Sirius: Flying High but Still Under Valued

Sirius XM Radio Inc. (NASDAQ:SIRI) has been lighting up the volume charts lately, and to a degree it seems warranted.  The company has broken the one dollar (per share) barrier and just turned its first quarterly profit since 2008.  Then, on the heels of this information comes the perspective that the share price for Sirius may be undervalued.

VALUATION - Over the past year, Sirius XM Radio (Nasdaq: SIRI) investors have become a bit more sophisticated, perhaps to their own detriment. The trouble with Sirius XM is that its common stock has never traded on valuation. There seems to be an attitude towards Sirius XM by some that suggests the share price may have topped out in recent days.

Just two years ago both Sirius and XM were hemorrhaging cash. Neither company could imagine a day when it reported positive free cash flow nor EBITDA, and both companies stood before an ominous mountain of near term debt. Price targets that were suggested at the time for Sirius alone were published anywhere from $5.00 per share to $6.50 by analysts such as Tony Wible of Citigroup (NYSE: C) or Jessica Reif Cohen of Merrill Lynch (NYSE: BAC), as it traded in the three to four dollar range. While both Sirius and XM were deep in the red, the market valued Sirius and XM at roughly $6 Billion each. A $12 Billion merger of equals ensued.

As we fast forward to today, there is a sudden “concern” over valuation as Sirius XM shares hover just above the $1.00 mark, and its fully diluted market cap of about $7 Billion. This is absurd in light of the fact that Sirius XM Radio is now the only provider of Satellite Radio in the United States. A look at the company’s well improved balance sheet and fundamental projections makes it even more absurd.

Recent trading activity confirms that the “smart money” is not buying into the valuation argument. Sirius XM’s large trading volume indicates that heavy institutional accumulation is occurring on a daily basis. Smart money seems to believe that $1.10 is a fantastic entry point into Sirius XM. Suddenly, the market has immense faith in Sirius XM’s ability to deliver positive earnings and free cash flow, well into the future. Putting a valuation on Sirius XM has always been an exercise in futility…  Source, Brandon Matthews – SeekingAlpha.

OUTLOOK - Sirius XM Radio Inc (SIRI) nabbed its first quarterly profit since its 2008 merge.

The company expects to sign 500,000 new subscribers to the service in 2010. Revenue was up 6% to $684 million, beating the analysts' forecast of $664 million.

With a subscriber boost and cost cutting, the company reported a 4Q net income
 of $14.2 million, or nil per share, compared with a 2008 net loss of $245.8 million, or 8 cents a share.

Thomson Reuters analysts forecast a loss of 2 cents a share.

 "Bringing Howard to Sirius was a great call!" said CEO Mel Karmazin on the earnings call. But executives gave few details on renewing his contract, saying that Sirius
 listeners should tune in to Howard's show for updates. Howard's contract, which is reportedly up in January 2011, does not specify when the company needs to start renegotiating with them. So "when we have something to announce, we will announce it," according to Sirius.

Ad revenue was flat compared to 2008. The company is cautiously optimistic about signing on more brands for 2010. But executives were sure to point out that Sirius generates $70 per listener per year, compared to terrestrial radio at $10 to $20 per listener per year.

They also see potential in wrangling in more traditional radio listeners. There are 25 million radios out there, and approximately 11 million active, according to Sirius. This provides many opportunities to reach out, beyond just listeners in cars and trucks.

The bottom line, according to Karmazin: Sirius XM is positioned to have the agility and flexibility they need to grow the bottom line.

"2009 was a notable year of firsts for SIRIUS XM: The first full year of positive pro forma adjusted income from operations and the first full year of positive free cash flow in the company's history," Karmazin said in the earnings statement. "We demonstrated considerable operating momentum in the fourth quarter - the addition of over 250,000 subscribers, ARPU growth, revenue growth, improved SAC, and continued operating cost reductions. These gains position us to deliver on our 2010 guidance." – Source, Gillian Reagan – Business Insider.