Serious About Sirius

JOAN LAPPINPRESIDENT AND CEOGRAMERCY CAPITAL MANAGEMENTCOMPANY: Sirius Satellite TICKER: SIRI (Nasdaq)PRICE: $4.54 (as of 4 p.m. yesterday)52-WEEK RANGE: $4.36-$7.98MARKET CAPITALIZATION: $6.3 billionMs. Lappin, is known as a “stock picker,” and Business Week has called her “an investment guru. She spoke with Katharine Herrup of The New York Sun about why Sirius Satellite Radio has taken the lead in its field.Why do you like the stock?Sirius has stepped into the lead of attracting subscribers, which has been driven, in part, by the arrival of Howard Stern. In the latest quarter Sirius had in excess of 700,000 subscribers, and XM had only 550,000 subscribers.How does Sirius compare to its competitor?Satellite radio is a duopoly that includes Sirius Satellite and XM radio. The two companies have over 10 million subscribers – XM has 6.5 million and Sirius has over 4 million – and now that the industry has surpassed 10 million subscribers, I think it has reached it point of critical mass. People not only have it in their cars, but are also getting receivers for their homes. Several automobile companies that weren’t building satellite radios into their cars are now adding them. Pretty shortly every manufacturer will offer either Sirius or XM.Why do you think Sirius is now better than XM?One of the knocks on Sirius was that the management would pay anybody anything to get them, it seemed. Sirius was running around just handing out shares, which is why there are so many shares outstanding. At the time Howard Stern decided to leave commercial radio, Mel Karmazin, who ran Infinity Broadcasting years ago, which eventually became Viacom, decided to leave for Sirius. Since Mel arrived, they’re running the place like a business, so the culture of pay anybody anything is over. Sirius agreed to pay Howard Stern shares worth $100 million if he produced 1 million subscribers, and he generated 3 million subscribers.There are also a lot of issues now with XM – they have been recently sued by several different companies. In the fourth quarter of last year, XM stupidly started selling pieces for $29 a piece to set off the Howard Stern effect at Sirius. Those units were getting subsidized by XM so they were losing money and someone at the company was selling their stock.How else have Sirius and XM affected each other?Personally, I think Sirius has been dragged down by XM. Sirius said that it needs no additional capital whereas XM may need more financing. A guy quit the XM board of directors in a vicious manner, which has not been helpful to XM or Sirius either. XM was on the low list twice last week. Also, the FTC complained about XM, but not Sirius yet. I think Sirius is doing fine and the company thinks they will be cash flow break even for 2007.What’s driving Sirius’s growth forward?Sirius is being well-run, it’s got some momentum, and now they are the better-known brand. Howard Stern served a lot of purposes, let alone bringing them 3 million subscribers who pay about $10 each month and that adds up to real money pretty quickly.What would you rather do spend $10 a month and have over 100 channels or have a latte every day for $4? I think most people would prefer listening to the radio.Mel is also going to sell commercials on the talk shows as well, although there will not be commercials on the music channels. Sirius expects to have over 6.2 millions subscribers by the year end. They have already acquired 761,000 more subscribers, which brought total subscribers to 4.1 million. Sirius expects a revenue of $1 billion in 2007, and the total revenue in 2010 to be $3 billion. Over a short period of time you go from losing a lot to free cash flow and then in a few years you’re at $3 billion.What cars will have Sirius?Sirius just reached an exclusive deal with Kia, Volkswagen, Audi, and Rolls Royce.What does Sirius broadcast other than Howard Stern?Music channels, Playboy radio, bluecollar comedy, a Court TV show, a Martha Stewart show that I don’t think is doing very well.Do you think the stock is undervalued?Of course! Why else would I buy it? Not only does the company have Sirius stock, I also own it personally.What are the risks?If nobody ever bought another satellite radio.

Serious About Sirius

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