Not a lot of options for SIRIUS XM Radio (SIRI)
Today's Financial News - Posted October 28, 2008
Strong cash flows and steady revenue streams are more important than ever. Companies, like SIRIUS XM Radio (NYSE:SIRI), that do not have the cash to get them through the next few months are in trouble.
By Andrew Snyder
Baltimore – (TFN): With the debt markets essentially closed, corporate executives and investors are realizing the vital importance of strong cash flows. The issue is more important than ever.
Without adequate sums of money circulating through a company’s books, its chances of survival are low. In the current crisis, a lack of cash over just a few months can lead to certain demise.
One company desperately struggling with this issue is SIRIUS XM Radio (NASDAQ:SIRI). With over a billion dollars in debt coming due in the next few months and revenues barely able to cover operating expenses, the company is in serious trouble.
Before we can figure out if/when this company is going bankrupt, we have to step back and examine the entire situation.
Not a pretty scene
As you probably know, the satellite radio “industry” used to consist of two companies, XM Radio and SIRIUS. After nearly half a decade of bleeding money, the two companies decided they could not survive on their own. So they begged and pleaded with government regulators and they merged. SIRIUS XM was born.
The merger made sense. Instead of two sets of fixed costs and two streams of revenue, the combined company could have one set of costs and one much larger revenue stream… and twice the debt burden.
If demand for satellite broadcasting continued to rise, the combined company had a shot at success. Unfortunately, subscriber growth has not met expectations and now a global recession is threatening to cripple growth completely. It could not have come at a worse time.
With over a billion dollars due to debtors early next year, SIRIUS has to find a solution fast. Like every other business, the company has two options. It can go to the debt markets or it can issue stock.
With SIRIUS stock selling for just $0.30, the company would have to issue more than three billion shares just to cover its short-term debt. Doubling the company’s float and diluting shares would do little to increase shareholder value, a company’s ultimate objective.
So that leaves the debt market. But with the credit industry out of whack, who is willing to lend to a company on the cusp of bankruptcy? The interest rate SIRIUS will have to pay would be out of this world. The company’s current revenue streams would barely be enough to make its interest payments twice a year.
There’s a hurricane ahead
Investors should learn the company’s answers to this dilemma in the next two weeks. While SIRIUS has not put its third-quarter earnings report date on the calendar, rumormongers have the big day scheduled for the next week or so.
For a company with nearly ten percent of its shares short, this will be an interesting month. If the company announces bad news, shares could plunge even further than the 87% drop they have made over the last year.
But if executives issue even a glimmer of hopes, this penny stock could squeeze its shorts out of their positions and share price would soar. With shares trading for a third of a buck, it would not take much to get shares doubling or even tripling in value.
Unfortunately, with a billion dollars hanging over your head, it will be nearly impossible to find good news.
Here’s what will happen: the company will extend its debt through high-interest notes (merely putting off the problem) and shareholders will ultimately foot the bill through huge amounts of dilution. It is either that or start looking for a good bankruptcy lawyer.
It is tempting to view this company as a shot at big-time speculative gains, but it is just another Wall Street trap. With so many other great investing opportunities out there right now, there is no reason to make such risky investments.
Stay away from this company. Invest in firms with a much better shot at profits. They are already making TodaysFinancialNews.com investors double-digit profits.
Next Article: What Dolphins owner Wayne Huizenga fears… and what you, too, need to prepare for
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