By Brandon Matthews
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…
Disclosure: Long SIRI
