Satellite Radio: Clear Growth, Far-Off Profits

Investments in outer space don't pay off? Try telling that to shareholders of the two companies licensed to beam down radio programming from way up there: Sirius Satellite Radio (SIRI ) and XM Satellite Radio Holdings (XMSR ). Their shares have soared into high orbit, and the market has been lapping up fresh offerings of their shares.

To see why, you need only check satellite radio's growth. This time last year, XM counted 360,000 subscribers. Now it has nearly 1.4 million. Sirius, which got a later start, saw its subscribership in 2003 swell 772%, to 261,061. Bulls expect such out-of-sight gains are merely a start, figuring that some sizable chunk of America's 100 million households, 200 million cars, and millions more trucks, boats, recreational vehicles, trains, jets, stores, and offices one day will be tuning in news, weather, sports, and talk shows, plus commercial-free music, via XM for $9.99 a month or Sirius for $12.95.

STILL, BEFORE WE ALL AGREE that satellite radio's only limit is the sky, prospective investors may want to consider a few demurrals. First, there's the plain fact that for all of satellite radio's success today, XM and Sirius are losing tons of money and burning cash. Wall Street expects XM this year to post a loss before interest, taxes, depreciation, and amortization of $250 million on revenue of $259 million; at Sirius, analysts see negative EBITDA of $313 million on $72 million in revenue. Both companies expect that at some point next year they will produce more cash than they consume. That's the best case -- meaning bottom-line profits are nowhere in view.

Invisible net earnings make price-earnings ratios meaningless. But a quick check of price-sales ratios is helpful. Satellite-TV distributor EchoStar Communications (DISH ), a once-small media outfit that pushed new technology and eventually brought big gains to investors, makes a reasonable comparison. According to Morningstar data, since 1995, when it had sales of just $164 million, the highest price-sales multiple EchoStar has traded for was 14. Today, XM sells for 60 times; at 392 times, Sirius is off the scale.

For kicks, let's assume that America and, eventually, Canada get hooked on satellite radio and new digital technologies which can improve AM & FM broadcasts, don't crimp satellite's growth. Sirius figures it needs 2 million subscribers to break even on cash flow; for XM, the figure is 3.5 million. Combined, that's more than triple their subscribers now. Given their recent growth rates, though, that milestone appears reachable. O.K. But meaningful growth in real per-share profits could be more elusive.

Here's why: To finance operations, both companies have ladled out buckets of stock options, warrants, convertibles, and other securities so that lenders, partners, and suppliers can participate in satellite radio's upside. In December, Sirius arranged to broadcast National Football League games starting next season. The deal calls for Sirius to pay the NFL $188 million in cash over seven years, plus $32 million in stock, plus warrants to buy 50 million more shares at $2.50 each. That's one of many such deals. All told, Sirius has committed to issuing enough common stock that its current total of outstanding shares could grow by a third. XM has been even more liberal with its equity. Its total shares outstanding could more than double, diluting $1 in hypothetical earnings per share into 49 cents.

Satellite radio will surely grow. Just remember that the risks surrounding any investment in outer space are so steep that President Bush, in unveiling his vision of space travel on Jan. 14, felt compelled to say: "Our efforts will be repaid many times over." Only, perhaps, not in our lifetimes.

By Robert Barker

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