Sirius XM Radio (Nasdaq:SIRI), which investors tend to love or hate, fell into disfavor once again after a disappointing earnings report Oct. 24 when rising expenses caused net income to slump 16%. But there is plenty about the satellite radio operator for investors to like.

The New York-based company has refinanced its debt over the past 15 months, cutting average debt costs to 5.5% from 9.2%. It also added 513,000 subscribers in the latest quarter.  Not only was that better than 446,000 customers it gained in the third quarter of 2012, but it surpassed the performance of some pay TV providers. Comcast (Nasdaq:CMSCA), the largest cable company,  lost 117,000 video customers in the most recent quarter. Rival satellite operator Dish Network gained 134,000 new customers, a record, as people dumped Time Warner Cable (NYSE:TWC) because of its dispute with CBS (NYSE:CBS) that lead to a blackout of the Tiffany Network for two weeks in some cities.  Sirius has 25.6 million customers, which is more than Comcast's 22 million video customers.

For some consumers, satellite radio is a must have.  Data from the Bureau of Labor Statistics estimates that there more than 1 million tractor-trailer drivers,  many of whom rely on satellite radio for news and entertainment.  They are such good customers,  in fact, that there is a satellite radio channel of programming just for them. It also can be a godsend for anyone who travels long distances by car for vacation. That is a considerable market as well.    According to AAA,  vacationers traveled on average 594 miles to their destination during the Labor Day Holiday.

Macroeconomic trends favor Sirius.  The company's radios come installed on 70% of all new cars.  Auto sales, which boomed after the Great Recession ended, are starting to slow down though demand will remain healthy. Edmunds.com estimates that vehicle sales will rise 6 percent to 16.4 million vehicles in 2014, its slowest year-over-year growth since 2009.  On the plus side, if the forecast proves to be accurate it would be the highest auto sales figure since 2006.   As a result, Sirius recently raised its guidance for net subscriber additions to 1.6 million, its second increase in a year.

Some consumers are selling their cars where they had Sirius subscriptions and are coming back to the company as trial subscribers when they buy new vehicles. Sirius, however, also is making inroads in the used car market.  According to the company,  it has partnerships with more than 9,000 used car dealers to offer customers free trials. The program is working well and many of these trial subscribers are becoming paid customers. Roughly three times as many used cars are sold in the U.S. compared with new ones.

While it's true that Sirius has many competitors such as Pandora (NYSE:P),  Spotify  and Apple (Nasdaq:AAPL), none has the reach of Sirius or the original content.  Pandora, which isn't profitable, has about 3 million paying customers while closely held Spotify has about 6 million.   Pandora attracts 68 million users who don't pay for its service while Spotify attracts more than 24 million active users. As for Apple, it's still early days for its iTunes Radio, which attracted 20 million users in its first five weeks. As for Sirius,  it has its own streaming music service which offers customers content that they can't get on its satellite radio service.    

Of course, the satellite radio provider's history has been rocky.  in 2009, the company avoided bankruptcy after it got a $530 million loan from John Malone's Liberty Media (Nasdaq:LMCA) in exchange for a 40% interest in the company.  Liberty has added to its position since then and now owns a 52% stake.   Liberty CEO Greg Maffei was recently quoted as saying that Siruis had yet to reach its "apogee" though he declined to say when such a cosmic event might occur.  He can afford to be patient given that Sirius' share price has surged more than 13 fold over the past 5 years.

Chief Executive Jim Meyer noted last month at the Liberty Media analyst day that Pandora generates about $6.50 per subscriber in yearly revenue while Clear Channel, the terrestrial radio giant,  generates $13 on that basis. Sirius, however, earns $142 for each of its subscribers, an indication that its business model emphasizing subscriptions over advertising is the superior one.    

Wall Street sees better times ahead for the corporate home of Howard Stern.  The average 52-week price target on the stock is $4.59, about 25% higher than where it currently trades.  Analysts expect to post double-digit revenue gains over the next two quarters along with increases in earnings per share.     The stock trades at a price-to-earnings multiple of 50, which according to Reuters is well-below its five-year high of 242.    

The Bottom Line

Sirius has proven the naysayers wrong for years.  The fact that it has survived is a testament to the tenacity of its former CEO Mel Karmazin, who among other things brought Stern to the fledgling service. The shares do trade at a lofty 50 price-to-earnings multiple, so they aren't cheap.  But there are a few reasons to expect the stock to move higher. Sirius has many avenues of expansion including a potential partnership with concert promoter Live Nation and by targeting Latinos with Spanish language programming. The company also may expand further into related businesses such as telematics, which provides on-board navigation among other things.

The time to buy Sirius  is now because it will probably wind up in Wall Street's good graces again.  When that happens, of course, today's share price will seem like a bargain.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

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