Sirius (SIRI) is in a very interesting position after years of subpar performance. Lazard has recently upgraded the company to a buy with a $2.25 price target. What's interesting is that analysts are starting to take the company seriously. Sirius has several positive catalysts going in its favor that the market is missing. The first one is the possibility of Liberty Media (LCAPA) adding to its 40 percent stake in Sirius. This would be a huge vote of confidence in the company at this point in time. Liberty Media practically saved Sirius in 2009 when it lent the company $530 million. Liberty Media is rumored to currently be in talks with Sirius about increasing its stake. I don't expect Liberty Media to sell its stake anytime soon; its loans to Sirius have returned over 15 percent and its preferred shares are now worth around $4.5 billion. I believe that Liberty Media sees the light and expects further upside from Sirius.
Another catalyst for Sirius is the move into the used car market. The company has seen success in the used car channel. The company is currently running trials with certified used cars. Sirius has over 3,000 dealers currently enrolled in this program. The conversion rates after the trials have been a little lower than in the new car market, but still very promising. I believe this is the beginning of Sirius getting its foot into the much larger used car market. The used car market is close to three times the size of the new car market. The auto market is getting competitive, and dealers are looking for ways to increase revenues. This should easily allow Sirius to expand its distribution as dealers look to Sirius to gain a competitive edge. I believe Sirius will ultimately be able to expand into the independent dealer network. Independent dealers account for about a third of used car sales in the United States and could be a huge growth market for the company. Sirius is also planning to diversify its business by adding 10 to 15 ad supported channels. This is a big step for a company that has long depended on subscriber revenue. I think this is an excellent move for Sirius; this gets Sirius right in the middle of competition with Pandora (P) and Slacker.
Sirius has very large advantage that investors are leaving out. Sirius has a much wider variety of content than Pandora or Slacker and already has a large base of paying subscribers. This is huge, since Pandora is currently trying to turn its free customers into paying subscribers. This of course opens Sirius up to the new market of smartphones. The future is bright for Sirius, as the company looks to take advantage of its size and relationships within the auto industry. The company has many angles it could go, and I expect shareholders to benefit from the company's turnaround. We are already starting to see the signs of the turnaround from the company's last earnings report. Sirius added 334,000 net subscribers in the third quarter; this takes total subscribers to 21.35 million subscribers. So far this year, Sirius has added over 1.16 million net new subscribers; this is a 6% increase compared to last year. Sirius confirmed its fourth quarter subscriber projections of 440,000 new net subscribers; this would be an increase of 34% when compared to the same quarter in 2010.
Sirius has also been showing great progress in minimizing expenses and maximizing revenue. The company generated $197 million in EBITDA, up 16% year-over-year for the quarter. Adjusted EBITDA guidance for next year implies a full year margin of 26%, up from an estimated margin of 24% for 2011. I'm bullish on Sirius and view pullbacks as opportunities to add to my position. The current price fails to factor the potential growth opportunities of the company going forward. Even though the catalysts I mentioned may not show up in the earnings for a couple years, I believe that long term investors will be rewarded if they build a position in this $1 area.
Disclosure: I am long SIRI.