Best High-Debt Buy: Sirius XM, DryShips, or MGM

In this Motley Fool series, we rank three related stocks on five criteria to determine the best buy.

Today's matchup is a battle among three companies with significant amounts of debt on their balance sheets: satellite-radio broadcaster Sirius XM (NAS: SIRI) , drybulk shipper DryShips (NAS: DRYS) , and casino giant MGM (NYS: MGM) .

Although they are in three distinct industries, each company faces operational challenges that are amplified in the face of leverage. The result is investor ambivalence leading to stock-price volatility (each has a beta above 2.0). So by using five short-of-scientific-but-carefully-chosen criteria, let's determine which of these three plays is the best buy -- assuming we had to buy one.

Round 1: balance sheet
From a debt-to-capital standpoint, we have DryShips with 50% debt, MGM with 56%, and Sirius XM with 86%. It should be noted that the only one with significant retained earnings is MGM, and that's a recent phenomenon. We'll check out operations, which lead to the ability to service the debt, next. Rank: (1) MGM, (2) DryShips, (3) Sirius XM.

Round 2: operations
From an operational standpoint, all three suffered some difficult times and during the recession. On a trailing-12-month basis, though, all three have positive net income and cash flow. Note that DryShips has negative free cash flow because of high capital expenditures, but that's more of an investment than an operational item. Looking at return on capital as an arbiter, Sirius XM is up to 11.4%, DryShips has fallen to 2.7%, and MGM is at 1.5%. I'll give extra credit to Sirius XM for most improved and some credence to MGM's retained earnings from the balance sheet. Rank: (1) Sirius XM, (2) MGM, (3) DryShips.

Round 3: growth prospects
This is a toughie to parse out because of the variables involved. MGM's success goes with Las Vegas tourism and the ability of its new-ish CityCenter complex. Competition and crowding around the globe from big fellow casino players such as Las Vegas Sands (NYS: LVS) and Wynn (NAS: WYNN) , which also tend to expand with large capital projects, must also be factored in -- as do new gambling markets through legislation.

Sirius XM faces stiff competition in its space as well. With its 20 million-plus subscribers, it's shown that people are willing to pay for high-quality music content. Still, it faces free services from Pandora Media (NYS: P) and other smartphone-available providers, as well as from terrestrial radio and cloud services from companies such as Amazon.com and Apple. It'll have to do more than hold its own on some combination of subscribers, price point, and costs to spur growth.

As for DryShips, it faces an oversupply problem in its industry, leading to volatile shipping rates. Survival is as big a consideration as growth. In survival times, a stronger balance sheet like the one at competitor Diana Shipping (NYS: DSX) may come into play. (Read more about the opportunities and perils of the drybulk industry.)

Analysts expect rosy growth for all three companies over the next five years.

Rank: (1) MGM, (2) Sirius XM, (3) DryShips.

Round 4: Price
On price, DryShips is priced for the aforementioned survival risk, not growth. Its forward P/E is a minuscule 4.4 and it's trading for a third of book value. MGM is trading for slightly below book value as well. Its P/E ratio is under 2.0, but that's due to a goodwill adjustment. Analysts expect negative earnings next year. Meanwhile, Sirius XM has a trailing P/E ratio of 44 and a more reasonable forward P/E of 23. Rank: (1) DryShips, (2) Sirius XM, (3) MGM.

Round 5: CAPS rating
Our CAPS community isn't especially excited about any of the three companies. Out of a maximum of five stars, DryShips is the winner here, with three stars. MGM and Sirius are rated just two stars. Rank: (1) DryShips, (2) MGM and Sirius.

The summary rankings

There you have it. Each company showed some strengths and some glaring weaknesses, but in a squeaker, MGM beats out DryShips and Sirius XM, at least based on these five criteria. What do you think? Declare your winner and share your thoughts in the comments section below.

At the time thisarticle was published Anand Chokkaveluowns shares of Sirius XM and Apple.Motley Fool newsletter serviceshave recommended buying shares of Amazon.com. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.