Hey, Now! Sirius More Attractive Than Ever (Update 2)

NEW YORK (TheStreet) - Sirius XM Radio(SIRI) is a battleground stock for several reasons. After years of battling down debt, and seeing the return of a healthy car market, analysts think there is some "serious" upside in Sirius.

CEO Mel Karmazin has been in the top spot at the satellite-radio company for nearly a decade, and has transitioned the firm from one that was heavily reliant on point-of-sales service to being reliant on the new car market.

Karmazin and his team has been regarded as a smart, financially motivated management team, similar to Liberty Capital's John Malone. Liberty owns 40% of Sirius. "It's going to be a free cash flow machine, and I think Sirius will trade at a premium to the market multiple on a free cash flow basis. Paying 15 to 20 times free cash flow for Sirius over the next few years is not a crazy idea," said one hedge fund manager who declined to be named. "It's pretty realistic to think it [Sirius] could see $3 in a short period of time."

Barclays Capital analyst James M. Ratcliffe wrote that he believes free cash flow will be approximately $420 million in 2011, but jump to $710 million in 2012, as subscribers increase and capital expenditures fall.

Automakers such as Ford(F), GM(GM) and Chrysler have seen strong sales in recent months, as the industry turns around thanks to a strengthening economy. Ford reported a 7% rise in January sales, while Chrysler sales rose 44%. GM sales fell as the Detroit-based automaker cut incentive spending.

Maxim Group analyst John Tinker believes Sirius is getting more attractive thanks to its first price increase in 10 years and their dominance in the new car market. The company recently raised prices from $12.95 per month to $14.49 per month, and there has been no backlash, Tinker said. "They [Sirius] are the only paid radio service, and car sales are picking up," he explained. "They are in 65% of new cars at the beginning." Tinker has a Sirius buy rating and a $3.20 price target for 2013, up from $2.50.

Debt, however, has been a major concern in the past, as the company spent to acquire content, most notably the $500 million, 5-year contract with Howard Stern. Other examples include deals with the NFL, Martha Stewart, and Oprah Winfrey.

Tinker noted that Sirius' debt is now under control, and the company is more likely to return cash to shareholders via a buyback or a dividend. "Cash flow growth is really solid, and the question now is what should the balance sheet look like. Should they buy back stock or pay a dividend?" he noted. The company also has an $8 billion net operating loss, meaning Sirius will not pay taxes for several years going forward.

As the price increase helps free cash flows, investors expect margins to tick up. EBITDA (earnings before interest taxes, depreciation and amortization) margins are currently in the low 20's, and Tinker said he expects them to move towards the low 40% range over the next few years.

During the Great Recession, Sirius was losing subscribers, but the company has seen positive trends as the car market bounced back. Sirius added 1.7 million net new subscribers in 2010. The company has a 2% monthly churn rate, down sharply from just a few years ago.

Barclays Capital analyst James M. Ratcliffe notes that even though satellite radio faces competition from other forms of in-car entertainment, Sirius "has continued to grow its sub base in spite of this, driven in large part by the company's alignment with automaker interests." Ratcliffe rates shares underweight with a $2 price target.

The issue with Sirius has always been its low stock price, as well as the fact that Liberty Media Capital(LMCA) owns 40% of the company. Liberty has historically sold off its investments or spun them out, such as Discovery Communications(DISCA),DirectTV(DTV) and others.

Analysts have also asked why Karmazin and the board do not do a reverse split to garner more institutional investor support. Tinker, however, notes that "the company has a lot of retail investors and they want to help them."

Sirius XM reports earnings on February 9. Wall Street analysts polled by Thomson Reuters expect Sirius to report $785.49 million in revenue and 1 cent per share in earnings.

Sirius shares are up 1.65% in Wednesday trading at $2.15.

Interested in more on Sirius? See TheStreet Ratings' report card for this stock.

And check out Roberto Pedone's technical take on the stock in "5 Earnings Stocks Poised to Pop."

Check out our new tech blog, Tech Trends.

Chris Ciaccia

02/08/12 - 12:37 PM EST