Sirius Tops Year's Best Media Stocks

Predicting the winners and losers of 2005

Sirius Satellite Radio company lost half a billion dollars last year, and it'll lose another half billion this year. But that hasn't stopped the company from being the No. 1 stock in the TV and radio business.

An anticipated surge of Howard Stern listeners and the hiring of Viacom's ex-President Mel Karmazin helped drive the satellite radio company's stock to become the best performer in an otherwise ugly year for TV and radio executives with stock options.

Sirius' stock has zoomed 152% since the beginning of 2004, and has become one of the hottest on the Nasdaq. The company beat out rival satellite radio company XM and other strong performers, such as cable equipment suppliers Scientific-Atlanta and Motorola.

Among the major media companies B&C tracks, Disney proved most impressive, with the bulk of its 18% rise coming after ABC's sudden fall-season turnaround. The losers list is dominated by local TV and radio station groups, who have yet to see anything resembling a turnaround in the economy.

The big question is: What lies ahead? Expect a Sirius itinerary to include another year of hype until it secures Stern in 2006. The company is desperate to get Stern on the air, since his strong fan base isn't likely to buy many $12.95 monthly subscriptions until Sirius is the only place they can get their Stern fix; so far, despite the hoopla, subscription numbers aren't up by much for the satellite radio service. Last Monday, Sirius said it reached 1 million customers. But that is exactly what the company had been predicting last summer, before it cut a deal with Stern.

The road to Stern will be a rocky one as Sirius continues to burn enormous amounts of cash. The company is expected to lose $440 million next year, on top of the estimated $469 million in negative cash flow posted in 2004.

Does Chairman Joe Clayton find it daunting to go through so much money in a year?

He compares it to the spending required to launch DBS services EchoStar and DirecTV. “How do you think Charlie Ergen felt about it a decade ago?” Clayton says, referring to the EchoStar CEO. “That's what you're talking about: new technology, new product, new company.”

Of course, Clayton has already brought Sirius through the financial fires. Just two years ago, he overhauled the company's finances, convincing bondholders to trade around $700 million in debt for stock, the way companies do in bankruptcy court. It is those old bondholders who control the company today.

Sirius' gigantic losses have nothing to do with the Stern deal, which hasn't kicked in yet. Sirius heavily subsidizes the cost of consumers' satellite radios. Car manufacturers get paid not just to install satellite radios in their cars, but to help them retool factories to do it properly. The expanding pool of retail stores selling radios get commissions not only from sales, but also from expensive store displays. Some of those costs will taper off, but not until 2006.

The bulk of Sirius' “stations”— smartly programmed music channels—are cheap to produce. Other product is not. Sirius will pay the NFL almost $200 million this year for satellite rights to its games. Stern's production company will start to collect around $80 million a year in cash in 2006.

It will take a lot of new Sirius-equipped cars rolling off dealers' lots to cover that kind of programming spending, or to support the company's current $10 billion valuation by the stock market.

The future of other big performers isn't quite so dicey. Cable-equipment manufacturer Scientific-Atlanta's business shows few signs of slowing down since big cable operators are continuing to push digital cable and digital video recorders, along with rolling out telephone services. Sales of cable gear should also be strong at Motorola, but that covers just 7% of the company's sales. Motorola's fortunes are more dependent on its volatile cellular phone division.

CSG Systems will have a tough time repeating 2004's stock performance. The supplier of billing systems and services jumped largely because it resolved a payment dispute with Comcast. It is hard to imagine a repeat of this.

Of course, the upcoming year's best gains probably won't be found among the previous year's winners, but among the losers. No one is expecting much growth at TV and radio stations, even adjusting for the absence of political spending in an odd-numbered year. The strong economy we keep hearing about seems to have passed by the stations. Station investors are praying for a rebound in the deal market, because salvation sure isn't coming from car manufacturers, the biggest local advertisers.

Among the big losers, Granite and Paxson are so heavily in debt that it is hard to imagine them rebounding dramatically (although they trade so cheaply, a buck or so would make for a large percentage gain).

What about the big boys? Disney's financial health is far more closely tied to the travel market than the advertising market, and the sizzle of the ABC rebound is already brightly reflected in the stock. Time Warner's biggest issues remain the sluggish America Online business and the reorganization of its cable systems operation, which is 20%-owned by Comcast and overdue for a breakup. At Viacom, CBS and MTV Networks show no signs of slowing down, but problem children Infinity Radio and Paramount show no signs of speeding up.

My favorite media stock: cable operator Insight Communications. The New York-based company's systems had lots of operating problems last year, straining in the face of competition from DBS.

But President Mike Willner seems to be getting operations under control. If Wall Street's gloomy sentiment for cable stocks changes next year, a small-cap company like Insight could post greater gains than giants like Comcast or Time Warner.