An Option Strategy for Sirius Radio

| About: Sirius XM (SIRI)
There are very few stocks in the investing universe than have a larger divergence of opinion than Sirius Radio (NASDAQ:SIRI). Believers in the company think it is indispensible for driving audiophiles and will dominate that space for the foreseeable future. Skeptics point to its large debt, new competitors on the horizon, vulnerability to a slowdown in new car sales or carmakers demanding more incentives and say it is headed to the bankruptcy courts. So who is right? And more importantly, how can you profit on this stock? First, let’s go over both the Bull and Bear cases for the company.
BULL – Sirius just passed 20mm in subscribers and is adding over 300K new customers a quarter. It re-signed Howard Stern, its flagship personality, to a new five year contract on more favorable terms than the previous contract. It should also benefit as the economy and new car sales rebound, as it gets 2/3’s of its new subscribers through this channel. Revenue growth increased 12% last quarter and the company is getting cost savings and synergies from its merger with XM radio. Its average revenue per customer is also increasing. Its improving prospects has led to a tripling of its shares over the last year and the company is gaining traction and will soon be heading back to its pre 2008 level of $4 or better.
BEAR – Sirius’ balance sheet has over 2B in net debt. Consensus earnings estimates for 2012 show Sirius making a whole 5 cent profit per share, and these estimates have come down in the previous 90 days. That gives Sirius a P/E of 37 on 2012 earnings. Sirius is also very vulnerable to any downturn that reduces new car sales as it gets 2/3’s of its new customers from this channel. As importantly, wireless technology is making great strides. This could allow internet radio to render Sirius Radio obsolete at some point in time.
Given there could one day be a cheaper and easily accessible alternative, why would customers sign up to be Sirius Customers? In the bear’s view Sirius is Nokia (NYSE:NOK) circa 2005 and Internet Radio alternatives are Apple (NASDAQ:AAPL).
Prognosis and Strategy – One of things that make Sirius so volatile and incites such passionate discourse is either case seems plausible. I think one of these two projected paths is likely to play out over the next 21 months leading to a bankruptcy filing or a stock price above $4. This leads me to advocate a creative strategy that will triple your money should either of these scenarios play out as outlined. The strategy involves buying one January 2013 $2 call for 41 cents for every two January 2013 $1 puts at 10 cents you purchase. Total lay out for each position is 61 cents plus commissions. If Sirius goes broke, you make $2 for your 61 cent investment less commissions. If the stock reaches $4, you also make $2 for your 61 cent investment less commissions. You break even or better if SIRI ends above $2.61 or below 69 cents. A risky, but cheap way to play Sirius in my opinion.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.