Sirius XM On A Fast Track To $2.75

Aug. 9.12 | About: Sirius XM (SIRI)

What an amazing few days Sirius XM (NASDAQ:SIRI) has had. Not only did shares show the usual appreciation into the earnings call on August 7th, but following the excellent call where Sirius XM met or beat street expectations, Sirius XM has gained a remarkable 27 cents in just two days time to close at $2.47. Stark contrast to most earnings calls where Sirius XM typically exhibits a "buy the rumor, sell the news" behavior, giving back all of its gains after the call no matter how good it is.

Some will argue that this quick run up is unwarranted, and that bulls will soon find prices returning back down to the $2 level. I would argue that those individuals are misinformed. How long has the bear crowd screamed Sirius XM is doomed, and a prime short? How long have they screamed that the likes of Pandora (NYSE:P) or even iHeart Radio from Clear Channel (NYSE:CCO) will be the grim reaper of Sirius XM, taking the company to the grave?

The truth of the matter is that Sirius XM has been woefully under priced for quite some time now. The recognition of 3 billion in NOL's (net operating losses) in the second quarter is just the tip of the iceberg of the huge bullish story to come that should drive Sirius XM over the next few years to highs not seen since 2006.

Mel Karmazin has stated in the past that 2012 would be a major turning point for Sirius XM, and it appears the man knows his stuff. Consider some of the many positives such as :

  • A well received modest price increase which has kept stable churn at 1.9%
  • Despite the price increase, Sirius XM is on track to have one of its best years in new subscriber additions, adding over 622,000 new subscribers in Q2.
  • Increased penetration into the used auto sector. All those idle radios present opportunity for new subscribers at a very low SAC.
  • Continued paying down of, and refinancing of high interest debt, driving down the cost of interest and driving cash to the bottom line. Sirius XM will begin by paying off $186 million in high interest debt on September 1st, and recently announced offering of $400 million in new lower interest debt to refinance higher interest debt due in 2013.
  • Progressive roll out of Satellite Radio 2.0 providing many new on demand features as well as record, rewind, playback, etc., all allowing for transition into IP as IP delivery becomes viable.
  • Prime real estate in nearly every car manufacturer's dashboard.
  • Strong interest by Liberty Media (NASDAQ:LMCA), which seeks to drive its stake in Sirius XM to full control.
  • An almost certainty of large scale share buybacks in the future, especially once Liberty Media obtains control.
  • Mel Karmazin has tempered his previous comments about working under the control of another, giving support to the idea that he will remain with Sirius XM after Liberty takes control.

To me, investment in Sirius XM has been simple, and if you check my history through my articles I have not wavered from my $2.75 fair value target for 2012. With the current bullish momentum, if Sirius XM can break the $2.50 barrier, it could very well run up to $2.75 and even beyond in short order. I would not be surprised to see $3 as investors pile in and momentum continues. 324 Million shares traded on Wednesday lends huge support to the current run, and I have seen nothing about the price activity throughout the last two days that indicates that Sirius XM is losing steam.

Investors should watch prices carefully in the following sessions. A break of $2.50 could catapult the stock skyward. If it appears volume starts to wane, and prices begin to come under previous lows, I may be a seller, and wait for a lower buy in price to increase my stake. Despite my $2.75 target, this run has gone far and fast, and a lock in of some long awaited profits may be a good idea.

For those sitting on a "long and strong" position and uncomfortable with trading, I see no harm in waiting things out. Sirius XM is finally returning to what I believe to be fair value. Remember, 2013 is just around the corner, and the strengths of 2012 should be repeated in 2013 to even greater effect. This is definitely a stock to own for the long term, and the long legs Sirius XM seems to be growing all of a sudden shows that investors are beginning to come to that very same conclusion.

Disclosure: I am long SIRI, LMCA.

Additional disclosure: I own and trade in and out of P puts on a regular basis.