The Bull Case For Sirius XM, And How To Buy It With Less Risk

| About: Liberty Media (LMCA)

I've sifted through a lot of articles on Sirius XM Radio (NASDAQ:SIRI) here at SeekingAlpha, and I find merit in both the bullish and bearish cases. Yes, there's an argument that it is overvalued or not even deserving of its current price. Yet few of these articles mention the single biggest reason why I am a bull, and I'll get to that in a minute, because it is also the reason why you can buy the stock in a way that reduces your risk -- without buying the actual stock itself.

While you ponder that mystery, let me point out a few things about Sirius. It has achieved broad consumer acceptance, demand is solid, and it should attract even more folks and see strong retention with its 2.0 product. It just instituted a price increase and consumers haven't balked. This will likely add significantly to the top and bottom line for years to come, with more price increases likely in coming years. Its operating margins have been on a steady increase, from 21.1% in FY 2009, leaping to 35.6% in FY 2010 and 47.8% in the first three quarters of FY 2011. That's astonishing.

And never mind gross margins, let's just talk profit. The company finally turned the corner in 2010 with a $43 million profit, and is already at $355 million through the first three quarters of 2011. In turn, this has helped drive free cash flow. That number was a negative $283 million in 2008, and has steadily increased to $385 million for the TTM -- with reduced capex coming, which will boost that metric even higher.

All in all, the company is telling investors that 2012 will see revenue up 10%, Adjusted EBITDA up 20%, and FCF up 75% to a terrific $700 million.

So, is it expensive at 30x 2012 earnings of $0.07 per share? Maybe. At almost 13x book value? Perhaps. And maybe you think all of this is great news, but you are still antsy about buying the stock -- especially if you are concerned it will experience a trading swoon.

So don't buy the stock. Instead, buy Liberty Media (NASDAQ:LMCA). Liberty has stuffed a bunch of its holdings into its latest securities incarnation, and those companies offer a lot of diversification against which to hedge your interest in Sirius, which accounts for roughly 82% of Liberty Media's current market cap. However, as this great SA article points out, the "market cap and share values don't come close to representing the assets underlying their ownership interests." I agree completely. By purchasing Liberty Media stock, you are not only getting in on Sirius, but you are getting access to a slate of companies that Liberty believes is undervalued.

The final reason to make this purchase is because you are also buying into John Malone and Greg Maffei. Liberty's way of doing business has been consistent -- it buys large stakes (or all) of great businesses and like Warren Buffett, it does not interfere. It buys assets because they are undervalued. All you need do is look at how the entire DIRECTV (NYSE: (DTV) deal played out. Liberty had a lot of power in that deal, but in the end chose to stay out of the way and just make money.

I expect the same to occur here, including an increase in Sirius' stock price.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in LMCA over the next 72 hours.