Sirius Satellite Radio is Seriously Undervalued

Sirius' (SIRI) stock price started last week with at a fast sprint and traded as high as $3.08 in pre market Monday on news of the FCC getting behind the merger, but tripped and fell by week's end and closed at $1.99 a share after Goldman reiterated its sell rating.  Although selling pressure ensued after the Goldman rating, I believe Goldman will regret its call much like it did with its financial sector call.

As reported late Monday June 23rd, Goldman Sachs & Co strategists urged U.S. stock investors to "underweight" the nation's financial and consumer discretionary sectors, admitting that it was mistaken when it upgraded both sectors just seven weeks earlier. 

In fact, Goldman stands alone with its sell rating on Sirius. Monday, June 23rd, after the close, TheStreet.com’s Patrick Schultz said on video interview "Goldman analyst is wrong about Sirius.” Mr. Schultz, like most other analysts, sees great reward and low risk at the current price.   Last week's June 17th Draft Order indicated that the merger approval is days or even hours away, as reported by Forbes. Furthermore, Forbes indicates that Siruis “…has continued to add customers at a hefty clip while bringing costs down.”   16 Analysts currently follow Sirius, and the majority of them have BUY ratings, much in conflict with Goldman. In fact, analyst Tom Watts at Cowen was very pointed in his disagreement with Goldman’s analyst, Wienkes

“We disagree with competitor’s negative view,” noted Watts . He also stated that investors could “expect a rebound.”  Watts cited several factors including: increased OEM installations (penetration rate) that would offset slowing car sales, substantial merger synergies of $5 billion, FCC approval in July, the debt issue being closed not as big a hurdle as some anticipate, and the arb spread to begin to narrow again as anticipated merger closure draws near.

At the current price, I don’t believe one can go wrong with Sirius, unless you are Goldman or you are short the stock. The upside is well above $3.00 while the downside is extremely limited.

Buy low, sell high.

Disclosure: Author holds a long position in SIRI

Comments

[ZenInvestor]

I agree. Flowers and candy to the Goldman boys for their buying opportunity for the rest of us. S&P just upgraded from Hold to Accumulate, and they got this one right. Love my XM radio, and the merger will be good for all of us, customers and shareholders.

[jswede]

satellite radio is going to die. I've not heard of anyone under 35 with any interest at all.

The fullblown internet is coming shortly to the car anyway, which means tens of thousands of station and podcasts etc available -- why would anyone pay for a redundant information/music system in satellite then?

[cos1000]

jswede...... My son-in-law and daughter just turned 30. They have satellite in both cars and in their home. They love it. There now, you've heard of someone. Do you really think the services your talking about on the internet will be free? You can already get those services for free by listening to commercial filled, limited content, terrestrial radio. Why wait? You have that now.

[BullishBroker]

I have two one for me and my wife we are both under the age of 35. You can't get sports content from mp3 players and I'm an avide sports fan. Also as my wife does taxes she is seeing more truck drivers calming them on taxes as work related...???? Don't really understand how they can do it, but it does make sense that truckers would prefer to have the same channels where ever they are then to have to change stations every 50 miles..

[RealMccoy]

Yeeaah..Wi Fi all over North America....from the badlands of the Dakotas through the deserts of california...and the long lonely stretches of highway from New Mexico to bar harbor Maine..yeeah right..and delivered how??? Little transmitter sticks every few miles??? The only way to achieve consistent wi fi delivered over satellite technology perhaps utilizing one of Sirius' satellites for a nominal monthly fee????

[jswede]

cos1000... I knew I should have said "under 30".. lol.

Anyway, my point is - and I admit I was not clear this time - that the internet is coming to the car, making the satellite infrastructure obsolete. The barrier to entry for competitors of subscription, commercial free, broadcasts - just like XMSR/SIRI - will become practically nil.

The rest of the story, complete with compressed margins and huge competition, is easy to figure out. and in the end, why even have satellite radio in the car when the internet - which also communicates diagnostics to my car shop/dealer and lets me control things in my house and get email etc - will provide the same type programming and is already there?

[JamesWK]

Full Blown Internet in the Car! WHILE DRIVING, women who are using a curling iron, putting on Mascara, smoking Newports, and drinking coffee at once, now they can check Oprah's reading list on the internet as well. Great Idea, Sounds Safe!

It's not just women by the way. Men do stupid things as well, it was just an example. Relax.

[quixsilver]

I only have 10K shares and I'm down $5K+ in the past 5 days - I can't even imagine those with huge blocks of 100K shares or more. You guys have balls of steel...

Anyone else thinking conspiracy theory? As in: the bigBoyz are unloading their positions because they know something we don't, like the merger isn't getting approved and K-Mart is just going through the motions to make it look like he's trying to do the right thing for the consumer, knowing full well he doesn't have the necessary votes?

Or is the general consensus that SIRI is being hammered so "GS & Friends" can jump back in for irresistible profits at the expense of us lil guys? Could it be that GS sincerely believes their assessment? Common sense tells me if they ARE being sincere, then they're simply wrong. I don't think "incompetent"... is fair because everyone is entitled to their opinion, if it's genuine...

[VMx]

McCoy is right. We are much further from a viable internet distribution method than most seem to think. It's easy to point to the internet as the future of radio broadcasting because of how revolutionary it's been in communications in general. But keep in mind that we're still dealing with a largely mobile market base for satellite radio and the internet does that quite poorly right now (and I'm being nice). I can only imagine the frustration of my connection dropping off every few miles while my device switches wi-fi connections.

But I think the real point here is the content issue. Yes, you can hear any kind of music over the internet, or even on regular radio. And yes, your iPod will give you quick access to pretty much any music or video you could ever hope to download. (Quick, mind you, not immediate). But millions of people listen to Sirius because of Howard Stern (as one example) and he's only available on Sirius. And as subscribership increases, which I believe will happen pretty quickly once the merger goes through, satellite radio will become increasingly appealing for other broadcasters and the content will become increasingly proprietary. Good for business.

For those of you concerned with the merger conditions (assuming you believe that an approval is coming): Yes, they're silly and un-American, but are they really any kind of threat? Fixed prices? Sirius wasn't planning to change its prices anyway. 4% of the spectrum given to minority interests? No problem - there's plenty of spectrum still available. And most of the other points are equally benign.

Yes, I'm a shareholder, so I do have a vested interest in satellite radio's success, but I'm an investor because I believe strongly in the future of this medium. Anyone who has used satellite radio knows how wonderful it is compared to regular radio. I've tried internet radio too and, for me, it doesn't compare.

One more thing. Run the numbers on Sirius. With the merger or without it, Sirius could very probably be the only satellite radio company in a few years' time. Either way, it's more than likely that Sirius will become profitable in three years, worst case four. Car sales may be dropping, but that's only a market delay. Once your car stops working, you need a new car! And if it comes with satellite radio, why not use it? Who's sweating the cost, really?

So the near term is uncertain, yes, but once earnings cross the zero mark, earnings multiples alone suggest that we'll see a stock price quite a lot more than double the $1.84 we see today. And that's ignoring any pop from the merger, which looks likely anyhow. It's a nearly certain 25% annual return at today's price, absolute worst case. I challenge anyone out there to show me a pro forma that says otherwise.

So I say... Buy!

[User 168418]

GOLDMAN SLACKS SHOULD BE BURNT AT THE STAKE IT'S CLEAR THAT THE NAB IS BEHIND THIS AND HAS BOUGHT OUT A KINGPIN TO DO THEIR DIRTY WORK FOR THEM.

[muley101]

SIRI should seed the high school and college campuses like Microsoft , Oracle, and Linux vendors did with a very low cost student plan. This could be done with on-line subscription by sending a copy of the student ID.

[willybob]

Satellite radio IS undervalued. They are also in a unique position to develop teen listening for the future. Terrestrial radio can't go near teens. Having only one station for which they sell advertising, doing so would upset their ratings demographics making it more difficult to sell advertising to adults.

Satellite radio is much different. They have many stations that are all subscriber-supported, and everyone buys the whole spectrum. Getting more teens to listen simply increases revenue, without any age discrimination that besets terrestrial broadcasters who have to shun teens.

So, need teens? No problem! Just take one or two (or more) channels and go hot and heavy after them with (to them) awesome national promotions tied to their schools, their relationships, favorite computer games or anything else they are impassioned about. Teens are really easy to get, you can get them fast, and you can be sure that they'd be subscribers if they were impassioned about what they were doing and hearing. In that way, they are no different than they've ever been. And their subscriber money is as good as mom and dad's (it's probably mom and dad's money anyway).

Contests that award the top high school in the nation weekend concerts from top national acts for a month (comped, of course), or noon-hour video game arcades for a month, or anything else that would stoke their energies, maybe via the old "School Spirit" contest, for example, or the wackiest stunt that got Sirius promoted on their local TV news would really get them up. I have family members in high school right now, and nothing's changed..they still are driven to "be true to their school and their girls", as the old song says.

Sirius is not only undervalued, but it is in a UNIQUE position to attract the young audience to lock up the future. Without getting these teens, where is the future?

[User 168418]

LIMITED STUDENT SATELLITE RADIO FOR $3.99 TO STUDENTS WITH COMMERICALS..........T... IN SOME AD DOLLARS.
GREAT IDEA............GET IT OUT TO EVERYONE!!!

[User 168418]

TAKE IN SOME AD DOLLARS TO OFF SET THE DISCOUNTED COST

[User 168418]

AFTER MARKET JUMP 8 CENTS A SHARE..........MAYBE THERE IS MERGER APPROVAL COMING .......IS ANYONE FOLLOWING THIS?

[satellite radio is dead]

You satellite radio investors are just hilarious, I love making money shorting these stocks! It's clear that you don't even understand the very basics in terms of a company's financial structure, and that's why I continue to make money off of your stupidity.

Hey dolts, wake up: these companies are two years behind on the subscriber forecasts they gave the Street back in 2002, important because said forecasts were essential in order to justify the overwhelming debt load and burdensome opex structure each had deployed. On top of that, the fees that each are paying to offer the programming are so nosebleed-high that they're not generating any return on the investment. And when you have to give warrants, options, and shares to these programming sources in order to sustain the relationships, you're in deep trouble because it merely dilutes your earnings per share all the more. Geez, neither of these two companies is even operating cash flow positive, and you're investing in these companies? Are you that stupid?

The bottom line is that, no matter how much you love the service, XM and Sirius, combined, are roughly 5 to 7 million subscribers short of where they need to be to grow profitably. That's why the merger took place, duh? The combined entity will slash costs to the bone and pray that oil prices have peaked, because without new car sales, even the combined earnings model won't come to fruition. The simple truth is that there aren't enough subscribers to keep satellite radio going for very much longer.

If I were XM and Sirius, I'd plan to sell air time for ads just like every other radio station. They desperately need the extra revenue because, in this weakening economy, I can tell you that it makes no sense for subscribers to keep paying their satellite radio bill if they can't even afford to put gas in the car that's playing it. But that would kill the differentiation between satellite and terrestrial, you say? It's tough being a company that's struggling to survive. Now go sell your shares before you lose your shirts.

[cos1000]

Haven't seen anything on the wire, probably just some investers who can't believe this opportunity to get in. Not usually a high volume of sellers after market close. Besides it's only up 4 cents now. On another article I heard there is magin call pressure on the stock after it broke 2.0. That should take a couple of days to sort out. Margin calls are more severe to the down side, stock gets sold at bid prices or market and during normal vs extended hour operation. I don't think we'll here anything until next week or the week end, just like Martin's Sunday epiphony.

[cos1000]

Sat Rad is Dead.......got a lot of balls asking people to play into your short position, knowing that the stock has already made you a hefty profit over the last week, off of long investor blood. Sure folks, you truly would be idiots if you listen to this guy/gal who is just playing on your fear during a really bad week. Hang in there a little while longer and watch this "short" scramble to cover. Buy the way you wouldn't happen to work for Goldman would you? NAB?

[quixsilver]

By the time this merger goes through, the subscription fee of $6.99 will be equal to the price of one gallon of gasoline. OK, so maybe I'm exaggerating, but siriusly: a one-month subscription for awesome content for $6.99? If anything, I think high gas prices illuminate how inexpensive SatRad really is. It's a pack of cigarettes. It's 1.5 gallons of gas. It's a mediocre sandwich at my office cafeteria. It's 3.5 shares of SIRI. I mean for real, yo. I don't think subscription prices will deter much of anything once potential consumers put it in perspective and realize how trivial it is, relative to the total cost of living.

[satellite radio is dead]

cos1000, I'm not that much of a novice to think that my posting on a message board is going to affect a stock price, particularly a stock like SIRI that trades more shares than any on the Nasdaq. If you really think that, then you are an even bigger dolt than I thought. I'm trying to save you some money, because the numbers just don't work with SIRI or XMSR, so take your tax loss and move on to something else. P.S. I've never had to "scramble" to cover a SIRI short, perhaps you should revisit the chart, this stock has nose-dived for the past 30 months. It's a zero. The second step that follows confronting your SIRI denial is admitting you have a problem.

[boston 1]

GS got it wrong onthe financials the most followed stocks, putting the issue of satellite radio in an unknown spectrum for them. Please if they got it wrong on the banks what can anyone expect from them on other issues that are not followedso closely. Looking at the DOW on a daily basis one can see everyone is guessing even the big boys.

[cos1000]

Sat Rad.....Don't flatter yourself that I thought your posting would move the stock price nor that I think your a novice at whatever it is that you think your doing. I have neither the time or patience for your condescending and inflammatory comments. Have a nice life and let others heed your BS. For myself I am enjoying my denial just fine.

Your just another jack ass that wants to goad people into an argument.....blah, blah, blah, satisfying your need to be superior. Folks like you are all over the internet. No one knows what your real position is, but its always the "Right One". Short when you should be and Long when you can speak of your genius and idiocy of the world and people around you. I'm sure your a fun person to have around, that's why your here telling us all what "dolts", "Idiots" and how stupid we all are. I don't know what any of us every did without you.....

[cos1000]

boston1....I agree with you in questioning GS' view, but in all fairness I also question Citi's view. This stock until a merger decision is virtually under attack by the shorts / bears, in a virtual "Black Out" of meaningful information. No guidance is available from the companies and they can't defend themselves at this time. Speaking to loudly about how good things will be after the merger or how erroneous analysis is could jeopardize the deal. In an odd way, as painful as it is, the weak stock price plays into the need for the merger.

quixsilver.... I hope your wrong about the price of a gallon of gas, but I agree that subscription price, especially for those who buy cars equipped with satellite radio, is not an issue. What are folks paying for MP3, CD's, IPODs and all the time to maintain them. Sat Rad is a convenience, a luxury. Those that have experienced it want more. In addition the secondary auto market, used cars, is growing with every car manufactured with sat rad installed. With a new car take rate by subscribers of 50%, that leave 50% that have never been turned on. The subscription acquisition cost, SAC, for these "second chance" consumers is very low, with consumer unit cost included in the price of the used car. The more mature the SAT RAD market gets, the better the secondary market becomes. You won't find a "metric" for this secondary market in any of your current GS or CITI analysis. ARPU and SAC will be effected by the mix of subscriptions bought: discount, 6.99 vs. premium 14.95. In all cases SAC goes down and revenue goes up.

[cos1000]

Muley101....Stan I though you had a great idea on that other post. After the merger the new company should turn on all of the used car, or new car radios that haven't been turned on for a free 3 month subscription. I think that was your idea, wasn't it? You should write to the folks at SIRIUS and share that one, after you negotiate a modest fee for your trouble, of course. LOL

[Merger Mania]

jswede and satellite radio is dead are too preposterous to even argue with. How come this big internet radio explosion hasn't happened already? I don't know about you, but in some rural parts of the country I can barely get any cell phone coverage. Cell phones rely heavily upon a terrestrial matrix of towers. These towers are ugly and are an eyesore. I am sure it's probably no different with wi-fi? What is the current range of these "hotspots." Even if they expanded the range of these "hotspots," then it still wouldn't be able to compete with the broad range of satellite coverage.

[VMx]

SRID: A little harsh on the delivery but I hear you. It's an opinion shared by a lot of investors and there's no denying the real possibility of failure. Now we have to wait and see how the proverbial cookie crumbles...

[Plowboy]

The merger will be 5-0.

SIXM will spilt offering 20-30 slots basics with commerical for free and premium content commercial-less for $$ by 2010.

I think GM and others are crying for backseat video which will be in the back of headrests.

I see this at 12.00 in 2013-2015 without rev splits.

[muley101]

The merger has to happen. How could the FCC kill their opportunity to have a country-wide emergency broadcast system in these times with terrorists, natural disasters, Amber aletrs, etc.. Mel needs to put that one on the table. I haven't heard of anyone talking about that.

XS will be at $6 by year-end because the speculators are hungry for a viable speculative stock in this market.

[in the middle of nowhere and in the air]

I need Sirius satellite radio when Im taking my long business trips, but when IM flying a plane I find the XM weather which provides nexrad radar and vital weather information, while allowing me to listen to great music. satelllite radio can't die because it will make the new generation of light plane avionics useless. look up the garmin 1000 avionics suite and understand why satellite has to stay.

plus it would be sweet to provide in flight movies in small cessna and mooney type aircraft

[willybob]

Muley101, yes you have hit on the fact that the satellite radio infrastructure is the only means by which broadcasts can be received by 100% of the country in a moving vehicle. Like you say there are a lot of defense implications with that, and the US Senate uses XM's hard drives as backup for their emails and other correspondence. They've been doing this for several years.

[willybob]

People also don't understand how a merger in this case provides more choices for the consumer. There is a lot of channel duplication between the services (each has Fox, each has a number of CNN services, all the same ones, etc.) They each also have a specific number of programming spots to fill. Upon a merger, they'd still have the same number of spots to fill in the combined service, but they'd certainly get rid of the duplicate channels, providing space for more choices with new programming. People don't seem to understand that.

[cos10000]

If the upside is so far above $3 per share, as you claim in your piece, then please quantify your statement. Rhetoric is cheap, but numbers drive value. Let's hear a dollar figure. Where is the ceiling? Tell us how you arrive at it.

If you are truly savvy and deserving of your own Seeking Alpha column, you'll do more than parrot Wall Street research and message boards. Share with us your basis for arriving at your "sell" price, beyond which this company will be overvalued.

Keeping investors informed goes beyond parroting Wall Street research and cheerleading a pet stock whose 10-K you likely have never bothered to read. Don't just goad your investing peers to buy. Offer them some real advice, and instruct them at what point they should sell.

I hear the sizzle. Let's see the steak.

[Roxieanne]

Vicar of Value

Numbers can lie and are often used to create lies by analysts--------number... are suppositions and opinions. Expected earnings get raised and lowered on a whim-----its all a game and one that few investors win------what seems today is not tomorrow.


"If the upside is so far above $3 per share, as you claim in your piece, then please quantify your statement. Rhetoric is cheap, but numbers drive value. Let's hear a dollar figure. Where is the ceiling? Tell us how you arrive at it-----"

Siri/Xm are in a period when some of the paid analysts are against them-------perhaps paid anlayst Mr. Winkie of Goldman will have a new vision next week-----will Mr. Winkie give the signal to rally or will Mr. Winkie say sell. Stay tuned.

[cos10000]

RoxieAnne - the fact that you failed to offer a celing price - and justify it - tells me that you have no idea where the celing is. That's a poor excuse for owning this company. if you can't identify the point at which it will be fully valued, why would you buy it? because it's $1.50 a share?

You're right - numbers can mislead. But so can shallow rhetoric posted anonymously on SeekingAlpha message boards.