Friday, February 19, 2010

Sirius XM (NASDAQ: SIRI): Poised For A Comeback

In a potential bit of good news for Sirius investors, the satellite radio provider may be making a stunning comeback from a year ago. Like the proverbial Phoenix, Sirius XM has risen from the ashes, better than ever. The company is in a much better position now, compared to the last year, when it was struggling to stay afloat.

There aren't many companies that get investors excited today, but many investors think Sirius XM now deserves a hard look. Shares of Sirius XM (SIRI) have rallied almost 88% this year.

The stock closed above $1 Wednesday for the first time since September 2008 easing worries of stock reverse split and delisting. Shares remained above $1 on Thursday as well and closed the day at $1.13. But that's still a far cry from all-time high of about $70 it hit in March 2000.

But let's give praise where it's due. The clearing of the $1 hurdle holds an important psychological impact for Sirius XM investors -especially institutional investors. Institution investors, of course, are reluctant to touch stocks below $1. Crossing the $1 level could also support the case for including the stock in the Russell stock indexes.The stock has recovered from an all-time low of 5 cents a share in early February 2009. The company suffered from a sharp slowdown in auto sales and poor consumer confidence. Sirius XM continued to post successive quarterly losses amid shrinking subscriber base. Saddled with a mountain of debt, Sirius XM was on the brink of bankruptcy. John Malone's Liberty Media came in at the 11th hour and saved the company from a potential bankruptcy by investing millions in exchange for preferred stock that could convert into 40% stake in Sirius XM.

The company has benefited from economic stabilization and a rebound in auto sales. Thanks to that improving backdrop, Sirius XM announced last month that it ended the year with 18,772,758 subscribers, adding 257,028 net new subs in the fourth quarter. The company also said it expect to report over $100 million in free cash flow for all of 2009, compared with a loss of $552 million in 2008. The company said it expects to meet its guidance for the year, with over $400 million in pro forma adjusted operating income, an improvement over more than $500 million from 2008.In a statement, CEO Mel Karmazin said the company’s strong Q4 sub growth reflects improved auto sales, conversion rates and better-than-expected self-pay churn. Those factors, he said, “suggest that the outlook for the auto sector and the effects of the economy on our business are beginning to improve.”

Thanks to economic recovery and federal tax subsidies, US auto sales have picked up in past few months. Sirius XM has installation agreements with all the major automakers. Approximately 55% of the company's total subscriber base comes from the automotive segment, with the remainder coming from consumers buying radios at big retailers such as Best Buy and Wal-Mart.

Sirius XM could also get a boost from Toyota's woes. A shift of car buyers to Ford from Toyota in the wake of the latter’s recent maintenance issues works in SIRI’s favor- the penetration rate for SIRI is over 70% for Ford, versus 40% for Toyota. He also notes that Ford cars ship with 6-12 month pre-paid subscriptions, versus only 3 months for Toyota.

However, despite several good news, few analysts are still skeptical of the stock's big run. It's still not clear whether the company's biggest star Howard Stern will be on the Sirius XM payroll at this time as their agreement expires at the end of 2010.

How far stock rally goes and whether or not it turns into something that can last longer than a few months remains to be seen.

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