Is Sirius XM Destined for Greatness?

Every investor can appreciate a stock that consistently beats the Street without getting ahead of its fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with improving financial metrics that support strong price growth. Let's take a look at what Sirius XM's (NAS: SIRI) recent results tell us about its potential for future gains.

What the numbers tell you
The graphs you're about to see tell Sirius XM's story, and we'll be grading the quality of that story in several ways.

Growth is important on both top and bottom lines, and an improving profit margin is a great sign that a company's become more efficient over time. Since profits may not always reported at a steady rate, we'll also look at how much Sirius XM's free cash flow has grown in comparison with its net income.

A company that generates more earnings per share over time, regardless of the number of shares outstanding, is heading in the right direction. If Sirius XM's share price has kept pace with its earnings growth, that's another good sign that its stock can move higher.

Is Sirius XM managing its resources well? A company's return on equity should be improving, and its debt to equity ratio declining, if it's to earn our approval.

By the numbers
Now, let's take a look at Sirius XM's key statistics.

SIRI Total Return Price data by YCharts.

Source: YCharts.
*Period begins at end of Q2 2009.

SIRI Return on Equity data by YCharts

Source: YCharts.
* Period begins at end of Q2 2009.

How we got here and where we're going
Without dividend payments to analyze, Sirius XM can earn only 7 possible passing grades, and it puts on a great performance, missing out on a perfect score only because of the math behind calculating percentages. The massive swing from negative to positive income results in a smaller net change that a swing from a very small free cash flow loss to healthy cash flows. If we were to compare the company's free cash flow growth with its stock-price growth, Sirius XM would have no problem acing every test.

Sirius XM has raised its customer growth guidance several times this year, which indicates its adoption momentum is accelerating. I already pointed out in an analyst roundtable that this is to be expected, since first-half subscriber gains could be annualized to show an increasing growth rate over the past three years.

An automotive focus has paid off as consumers have started buying new wheels in greater numbers. September's sales figures showed a 13% increase over the prior year. Only Ford (NYS: F) saw a year-over-year sales decline as consumers turned away from trucks, but it's the aggregate increase that matters most to Sirius XM, as it maintains a partnership with every major automaker.

Sirius XM also maintains a leg up on streaming-radio rival Pandora (NYS: P) with the ability to deliver high-quality programming at reasonable costs, to both itself and its listeners. Pandora and most of its competitors rely on ad dollars, which leaves them vulnerable to ad-free streaming threats, such as the one built by Nokia (NYS: NOK) as a benefit for Lumia users. Apple (NAS: AAPL) also seems interested in building a Pandora-killer, which could cause real headaches for independent streaming services.

Sirius XM offers streaming versions of most of its content but does a much better job keeping the money its content generates than Pandora, the result of a ridiculously generous royalty payout system. Maintaining its profitability has allowed Sirius to knock down a chunk of high-interest debt, giving its balance sheet a healthier glow. Sirius XM bears warning of high debt levels seem to glide over the company's deft management of that debt, and its firm commitment to hacking it down.

Putting the pieces together
Sirius XM has many of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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The article Is Sirius XM Destined for Greatness? originally appeared on Fool.com.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights.The Motley Fool owns shares of Apple and Ford. Motley Fool newsletter services have recommended buying shares of Ford and Apple, as well as creating a bull call spread position in Apple and a synthetic long position in Ford. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

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