Next Stop for Sirius XM: $3.75?

Sirius XM Radio (Nasdaq: SIRI) hit fresh four-year highs today after Bank of America Merrill Lynch analyst Jessica Reif Cohen initiated coverage of the satellite radio provider with a bullish Buy rating.

One can argue that Cohen is late to the bullishness. The stock has soared since bottoming out at a price of $0.05 a share three years ago. Is a stock worth buying after a better than 50-fold advance?


"Sirius XM's best days are ahead," she writes, arguing that automobile sales are recovering nicely.

Yes, Sirius XM is still at the mercy of the automotive industry. The satellite radio giant hasn't had a problem improving its operations. CEO Mel Karmazin has excelled at improving the company's operations. Margins, profitability, and free cash flow continue to improve at healthier clips than the slower top-line upticks suggest.

Where will Sirius XM be if car sales do bounce back to the point where subscriptions shoot through the roof?

Revving up
The news today on the automotive front is largely encouraging. Toyota (NYSE: TM) , Volkswagen, and Chrysler came through with vehicle sales soaring 42%, 34%, and 12%, respectively, in September.

The news out of Ford (NYSE: F) and General Motors (NYSE: GM) isn't as bright, but there's more to those numbers than meets the eye.

GM only mustered a 1.5% advance, but that was bogged down by a 20% plunge in truck sales. Passenger cars -- a more important metric for Sirius XM -- actually rose a robust 29%. Ford's 4% pop in sales in September isn't very impressive, but the 73% spike in small-car sales will result in a boost to Sirius satellite receiver activations.

High gas prices are apparently helping Sirius XM, forcing drivers of older gas guzzlers to upgrade their vehicles to smaller and more fuel-efficient cars.

The long road to $3.75
Cohen's turning heads with her ambitious price target of $3.75 on the stock. None of the earlier bullish analysts have price targets even remotely close to that mark, but Cohen is confident in the visibility of the next few years of strong generation of free cash flow and EBITDA.

Cynics will argue that this is a dangerous time to initiate bullish coverage on the company. Liberty Media (Nasdaq: LMCA) is nearing majority control of the company, and there's a legitimate concern that the media giant will spin off its stake in Sirius XM at that point in a tax-advantaged transaction.

However, there's also another analyst chiming in with a bullish perspective -- for both Sirius XM and Liberty Media -- when it comes to that particular matter. Citigroup analyst Jason Bazinet upgraded his rating on Liberty Media to buy this morning. He's also boosting his price target on Sirius XM from $2.50 to $3.

What? Won't a spinoff hurt shares of Sirius XM as Liberty Media investors unload the stock that they receive? Not necessarily. Bazinet sees the potential of Sirius XM initiating a $3 billion buyback, a move that would not only help recoup the $1.4 billion that Liberty Media has invested in taking its effective stake from 40% to nearly 50%, but also a move that will dramatically shave the number of Sirius XM shares outstanding.

Worrywarts will argue that the last thing that the company needs is more long-term debt on its books, but the viability of the satellite radio model and the company's ability to service the debt as rates shrink given its improving fundamentals is surprisingly sound.

We'll have to see how it all plays out, but Cohen may have a point about Sirius XM's best days being in the future.

Running of the bulls
I recently put out a premium report on Sirius XM Radio, detailing the challenges and opportunities that await investors that are both long and short the dynamic media giant. A year of updates is also included with the report. Click here to check it out.