Sirius XM surprises with profit but stock sinks

NEW YORK (CNNMoney.com) -- Satellite radio company Sirius XM swung to a profit and added more subscribers than expected on Tuesday, yet the stock tumbled.

Shares of Sirius XM (SIRI) fell 6%, or 7 cents to $1.16.

"On the surface, the stock movement doesn't make much sense," said James Goss, analyst at Barrington Research. "I didn't see a lot of things that would cause me to sell the stock."

In the first quarter, Sirius XM reported net income of $41.6 million, or 1 cent a share. In the first quarter of 2009, the company lost $238.8 million. Sales increased 11% to $670.6 million.

Analysts polled by Thomson Reuters expected the company to break even on revenue of $671.3 million.

"These results show the tremendous appeal of our service and the strength of our business model," said Mel Karmazin, Sirius XM's chief executive, in a statement. "The continuing recovery of the automotive sector and expanding signs of increased consumer spending are encouraging signs for the company's growth prospects."

Sirius XM is available online, on special satellite radio devices, and some stations are available on an iPhone app, but the majority of its new subscribers come when new car buyers have Sirius XM radios installed. Accordingly, the company's success is somewhat pinned to the success of the auto industry.

On the back of rising auto sales in the beginning of the year, the company added more than 171,000 subscribers in the quarter, putting it on pace to demolish its earlier estimate of 500,000 new subscribers in 2010. But the company chose to reiterate the 500,000 number, even after much prodding from analysts on a conference call Tuesday morning.

"Considering the dark phase this company went through, it's a company that rightly wants to put out numbers that they're going to be able to beat," said Martin Pyykkonen, analyst at Janco Partners. "They're in a wait and see mood, because they don't want to hang themselves out there to get shot by investors. At the same time, the fact that they didn't up their guidance may be why the stock is down."

Sirius XM's stock has nearly doubled this year, roaring back after trading as low as a nickel a share in early 2009. Shares slipped below $1 in September 2008, as the credit crisis sent the economy into a tailspin. The company was on the brink of filing for bankruptcy due to its enormous debt, before it got a cash infusion from Liberty Media Corp in February of last year.

The Nasdaq stock exchange, which usually delists stocks that fall below $1, chose not to delist Sirius XM, because the company is so actively traded and has a market value of about $4.4 billion.

The company announced in April that rising auto sales would help grow subscribers, and the stock finally rose above $1 in the middle of last month. Analysts say that the stock's clearing of the $1 hurdle lifted away a gray cloud that had been hovering over it, making investors anxious.

Though the first quarter was solid, it will take several more like it to prove to investors that Sirius XM's financial situation has truly stabilized -- and before the stock can rise from the dollar doldrums. The company is also prohibited from raising prices for another year and a half, according to the terms of Sirius and XM's 2008 merger.

Debt is still a problem for Sirius XM too. With $2.8 billion in long-term debt, the company is slowly paying it down with profits. All of this past quarter's profits -- and then some -- went to pay down debt. That's money that the company won't be able to invest back into the business.

"It'll be tough to get to $2 in the near term, since they still have to deal with their debt situation," said Brett Harriss, analyst with Gabelli & Co. "But if they continue a run like this, there's a very good case for $2 in 2013."

Sirius XM also faces a big decision at the end of this year: Howard Stern's contract is coming to an end. Stern, who signed a landmark five-year, $500 million contract in 2005, is the most famous Sirius XM attraction. And analysts say he is responsible for the addition of about a million subscribers over the course of his satellite radio tenure.

Analysts widely agree that Stern will continue on with Sirius XM, but if he doesn't it could spell trouble. Based on average subscriber fees and expected growth, it would take a loss of 1.1 million subscribers for the company to swing from a profit to a loss, according to Hariss.

Though presumably some of the customers that Howard Stern helped Sirius XM add would find reasons to continue their service if he left, others would undoubtedly cancel.

"That's not an unreasonable number, but the probability of him leaving is small," said Harriss. "Stern wants a bullhorn and a lot of money, and the only place he can get those is satellite radio."