Sirius XM Hits $3, Should Move Higher


"Are you better off than you were four years ago?" became a rallying query during last month's presidential election, but now Sirius XM Radio can respond with a positive nod.

Shares of the satellite radio provider hit $3 in intraday trading today. You have to go all the way back to March 2008 -- four years and nine months -- to find the last time that the stock was trading this high.

It was a different time then.

After weighing the proposed combination for more than a year, regulators finally approved the merger of Sirius and XM in March 2008. There was excitement about the obvious synergies. The two companies would be able to shave overhead to become a profitable company. There would be a big gain in negotiating leverage, forcing automakers that wanted to offer satellite radio and on-air talent that wanted to reach satellite radio's premium audience to play on the media giant's terms.

When things didn't play out that way, Sirius XM's stock sputtered. Just 11 months later, that $3 stock traded as low as $0.05.

Don't worry. History won't repeat here.

Bigger and better
Just because Sirius XM is back at $3 doesn't mean that it's merely back to where it was nearly five years ago.

Sirius XM is actually worth far more today. The effective number of shares outstanding popped 60% in early 2009 after Liberty Media received a 40% preferred-share stake in exchange for some lifesaving financing.

In other words, the market did ultimately reward Sirius XM for coming through with becoming a viable media heavyweight. If it could've survived without Liberty Media, we could have very well been popping the cork on a $5 price tag at the current market cap.

Moving on
It's apparently never too late to become enamored with the satellite radio story.

Goldman Sachs analyst Matthew Niknam initiated coverage of the only game in town when it comes to satellite radio with a bullish buy rating today. His price target is a modest $3.50 at the moment.

An encouraging aspect of Niknam's thesis is that Sirius XM will tap its newfound wealth and booming free cash flow to begin reversing the bloat of Liberty Media's float. He sees Sirius XM engaging in share buybacks to reduce its share count by 20% in the next three years. He sees it repurchasing 45% of its shares over the next 10 years.

It's easy to get excited about Sirius XM's prospects at this point. It isn't growing as quickly as it was the last time that the shares hit $3, but it's no longer an unproven entity.

Sirius XM is a survivor. It has grown in a time when a growing number of smartphone owners can stream Internet radio and playlists from a growing number of cars. It has grown despite the quickly expanding popularity of Pandora -- and soon it will have its own Pandora-like streaming service.

The market has come to accept that streaming and satellite radio aren't rival choices. When reports surfaced a few weeks ago that Apple was negotiating with the major labels for a streaming service, Pandora's stock took a hit, but Sirius XM shares held up reasonably well.

Niknam is encouraged by the recovery in the car market, and that's important since it remains the lifeblood of subscriber growth until Sirius XM makes a name for itself with its online product. Just as we've seen free cash flow and adjusted EBITDA grow faster than Sirius XM's top line, Niknam sees margins continue to widen with this truly scalable operating model.

A healthier Sirius XM will result in cheaper financing. The company doesn't have a lot of major capital expenditures to plan for in the next few years, so a lot of that money can go toward retiring shares, paying dividends, or making acquisitions that can benefit from the billions in past tax losses that it can use to offset future taxes on profits.

Now, Sirius XM hasn't gone from $0.05 to $3 in a straight line, so investors shouldn't expect a steady climb up to Niknam's $3.50 target and beyond. Corrections have happened and will continue to happen. However, Sirius XM has never had it this good -- even if eyeing a stock chart that goes five years back and beyond may tease you into falsely believing otherwise.

Running of the bulls
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