Martha Still Relying on “Insider” Trading

Rough life for Martha Stewart these days, right? Perhaps. But at least she is staying on top of her finances from prison. On December 14th, Martha sold 300,000 shares of her company’s stock, MSO, for a little over $27 each, netting proceeds of $8.2 million. This is surprising, not because selling doesn’t make sense (the stock has rallied from $8 to $33 a share) but because it seems to me that maybe inmates should be prohibited from trading stocks from jail. But what do I know?

Sirius/XM Valuations Top Clear Channel

December 7, 2004. Mark it down. Today’s the day when the combined market values of XM Satellite Radio (XMSR) and Sirius Satellite Radio (SIRI) reached $20 billion for the first time, topping that of terrestrial radio giant Clear Channel Communications (CCU), which Wall Street values at $19 billion.

Sirius and XM have about 3 million subscribers, a number expected to hit 30 million within 10 years. Investors really have no idea if that estimate will come to fruition, and if it does, how much revenue (and more importantly, profit) these companies will be generating.

What we do know, however, is what Clear Channel has that warrants a $19 billion market value. As of 12/31/03, CCU employs more than 35,000 people, owns 1,200 radio stations along with 39 television stations. They also own about 800,000 outdoor advertising billboards worldwide. CCU owns and/or operates more than 100 live entertainment venues across the globe. Cash flow, measured by EBITDA, for the last 12 months totaled $2.4 billion. Sales for 2004 should hit $9.5 billion, with net income reaching $800 million.

This comparison reminds me of the 1999-2000 bubble days when Priceline.com (PCLN) was worth more than the entire airline industry and AOL bought Time Warner.

Now, its true that 10 years from now SIRI and XMSR could prove to have been bargains at current prices. However, just be aware that today’s investors are not paying any attention to valuation (mainly because at this point we have no idea how much these companies will ultimately earn), and as a result, they are basically rolling the dice rather than investing in a business.

That said, individual investors seem to think their odds of profiting from satellite radio stocks are far better than the Powerball lottery or a craps table in Vegas. If you want to short these stocks, based on a valuation that cannot be justified, please restrain yourself. The momentum here is too strong in the short term for valuation to play a role. We’ve seen this as the stocks continue to rise in the face of multiple analyst downgrades based on valuation concerns.

Unlike the late 1990’s, the analysts are now doing their jobs correctly by warning that current prices don’t make much financial sense. So, it seems most have learned their lessons. However, as those of us who have followed the markets for many years know all too well, even when analysts are doing their jobs, investors can’t rely on their recommendations to make money. On that front, nothing has changed this time around.

More on Satellite Radio…

Sirius (SIRI) shares are up 20% after-hours after the company announced that Mel Karmazin, former head of Viacom, will become CEO. Increase in market cap due this development? $1 billion. Wow. Can one man really be worth that much money? Of course not, but investors are jumping on the bandwagon anyway. I just heard a projection that satellite radio will have 30 million subscribers by 2010. Once again, we can use this to try and justify a $14-$15 billion market value for SIRI and XMSR. With 30 million subs paying $10 per month, you get industry revenue of $3.6 billion. A 10% profit margin gets you net income of $360 million. So, these stocks trade at about 40 times 2010 earnings, if these assumptions prove accurate.

Investors Tuning In to Satellite Radio

The market is down today, but the satellite radio sector continues its ascent. XM Satellite (XMSR) and Sirius (SIRI) are seeing tremendous interest, mostly from retail investors looking to cash in on “the next big thing.” XM and Sirius today sport a combined market value of $13.5 billion, despite having never reported a single dollar in profit. Clearly, investors are betting on future earnings with this sector, but is there enough profit potential to justify the satellite radio market’s value at $13.5 billion today?

As usual, numbers can help us give color to the situation. While they can’t predict how the satellite market will play out over time, we can get a good idea of what the “upside” really is. According to the Department of Transportation, there are 200 million vehicles in the U.S. We’ll ignore the international markets for now, given that neither XM nor Sirius has hinted it will try and tackle those as of yet, probably for good reason. Even though prices of technology products and services tend to decline over time, we’ll assume that the $10 per month subscription fee will remain constant.

So, it’s relatively easy to determine the total market potential. If each and every car in the U.S. was equipped with a satellite radio, the industry would garner $24 billion in annual sales. Profit margins are tough to guess, especially when XM and Sirius are paying hundreds of millions of dollars to secure their content such as Howard Stern, Major League Baseball, and the National Football League. Leading radio companies such as Clear Channel and Cumulus Media net about an 8 percent margin, so we’ll use that as a guide to determine the total market’s annual profit potential: $1.9 billion.

These numbers are important because many investors who are buying these stocks today are not looking at the numbers behind the stocks, namely the extreme valuations already built into the share prices. Paying $13.5 billion today, for profit potential of $1.9 billion annually, seems excessive given that this assumption requires one to believe that every car, truck, and SUV in the country will eventually have a satellite radio. After all, only about 50% of households own computers and only 70% have cable television.

If we were to assume that in 10 years, half of all vehicles will have a satellite radio, the market will earn less than $1 billion in profit. So, investors today are paying 14x projected 2014 earnings. Clearly, a lot of people see this as a bargain. Only time will tell.