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Losing Faith in Sirius

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Barclay Capital analyst James Ratcliffe did what so many other investors have done lately when it comes to Sirius XM Radio (Nasdaq: SIRI  ) : He walked away.

Ratcliffe discontinued coverage of the satellite radio giant yesterday.

"We believe that the equity price is not being driven by fundamentals or the future of the underlying business, but rather purely by speculation as to the company's ability to refinance or restructure upcoming debt maturities," Ratcliffe explains, as recounted by BusinessWeek's "The Tech Beat".

In other words, Sirius has become a crapshoot. It's a lottery ticket, hinging almost entirely on CEO Mel Karmazin's ability to refinance the company's debt before the nearly $1 billion that is due this year forces the company into bankruptcy reorganization.

He's right, but doesn't that make this the best time to be covering the company. Sirius may be a stock in casino wrapping, but it simply raises the stakes for those who can have a better handle on Karmazin's ability to keep the satellite radio provider solvent.

At a recent price of $0.11, it's easy to dismiss Sirius. However, it remains one of the most actively traded stocks. As a result of its bloated shares outstanding count since its merger with XM, Sirius commands a market cap of nearly $400 million.

It doesn't end there, though.

If you want to make some easy money with your financially dim buddies, bet them that they can't guess what the price of Sirius would be if the market's perceived value of the company would double.

The correct answer isn't $0.22, based on its $0.11 starting point. It's actually closer to a buck, when you factor in the company's debt load to arrive at an enterprise value of roughly $3.4 billion. If its enterprise value would double to nearly $7 billion, that's where the stock price -- and market cap -- would have to be.

The leveraged upside doesn't take away from the grim possibility of a bankruptcy wiping out common-stock shareholders. In music -- and digital music in particular -- Sirius must compete against cash-blessed companies like Apple (Nasdaq: AAPL  ) and RealNetworks (Nasdaq: RNWK  ) . Other digital heavies such as (Nasdaq: AMZN  ) , Time Warner (NYSE: TWX  ) , Best Buy's (NYSE: BBY  ) Napster, and CBS (NYSE: CBS  ) have the means to ramp up spending if this ultimately becomes an arms race.

However, the feast-or-famine mind-set doesn't justify walking away from Sirius as an investment. One less celebrated analyst tracking the company will leave the ultimate lessons in this hit-or-miss case study unheard and unheeded.

More news than static on Sirius XM:

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Best Buy is a Motley Fool Inside Value pick. Best Buy,, and Apple are Motley Fool Stock Advisor picks. The Fool owns shares of Best Buy. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz subscribes to both XM and Sirius. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

Read/Post Comments (10) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 29, 2009, at 4:44 PM, PTURBED wrote:

    Blah blah blah...

    Why would anyone buy a subscription to a rag that spends it's time trying to bury an 11 cent stock that you FOOLS pumped?

  • Report this Comment On January 29, 2009, at 5:13 PM, Skysclear wrote:

    Ptburb , put it best when he said..."Blah, blah, blah"

    And calling this a 'Crap Shoot'?

    Riiiiiiiiiight!.. A 3.5 Billion share Holdings Gamble.

    Where's the nearest Game in town like THIS one?

  • Report this Comment On January 29, 2009, at 5:27 PM, ByrneShill wrote:

    ...doesn't justify walking away from Sirius as an investment.

    Longtime Fool contributor Rick Munarriz [...] does not own shares in any of the companies in this story.

    nuff said.

  • Report this Comment On January 29, 2009, at 8:34 PM, GuruJ wrote:

    I would think the drama at Sirius would make it more interesting to report about and watch.

    At .11 it's more then a lottery ticket. If I could pick someone in media to bet the farm on for securing a future for Sirius, Karmazin is my pick. He has made a 2nd place (by long ways) company into the the sole provider in an emerging market of delivery entertainment. He has satellites in freaking space and more bandwidth then he knows what to do with!

    They also have the one man that people would pay $13 a month for. Not a couple thousand but 6-7 million..... Think about that.... Pick any entertainer and ask "Would this person get 2 million people to pay $13 a month?"

    Remember the worth in the actual company and it's assets. It's nothing to shake a stick at. Non-tv Sat media is a new market with the possibility of an Apple style deal a day with all the media players.

    I also believe they haven't exploited the business market to it's fullest potential. Muzak is damn expensive and the outlay huge. I use them in my business for much less and better programming. Think of all the stores, dr, offices, elevators, and tanning salons that could have cheaper programming.

    I do own SIRI at .12 . Only a few k. More importantly I believe in non censored direct media. Big Media has squashed niche entertainers. Side and smaller mediums need support so we hear all the voices and allow people the options of a free diverse press (or a pure techno station). A Spa station without commercials is what the world really needs, Sirius has that!

    It's more then a lottery's a "decent" bet. And faith wasn't needed for that conclusion.



  • Report this Comment On January 29, 2009, at 8:37 PM, sl6209 wrote:

    Mr Slick Rick...

    Hey man, been a little while since I stopped by and did a little ranting about your articles. And you might think that's why I'm here tonight. But o'contare this time my friend. I've been checking out your recent posts in the background and it appears you finally have "gotten it". Somewhere in the last few months you saw the light and can finally see that BK is not the course of the near future. Because you know if it were it would be done by now. I think your mind was temporarily poisoned by idiots like Doug M over at that rag WallSt 24/7...who spent better than the last year salivating about SIRI's demise. HE SAID, they wouldn't make it past '08. Way to go DOUG. I hope you choke on your own excess saliva! you obsessed moron.

    But Rick, enough about Doug. He's a schmoe and you aparently are not. You can see past your own nose. This idiot at've seen right through is idiocy too. What a dope!!! A lottery ticket. Really, James? We're glad to be rid of you finally. SIRI is no more a lottery ticket than any other stock my friend. What, are you just embarrased to cover a stock that is so manipulated by hedge shorts, et al and doesn't move because it has to many shoes on its throat? Good James. Buh bye you dope.

    Rick, you can at least see that debt aside, SIRI has great metrics...and will prove it once again in about 20 days in the Q4. Your assessment of the SP value is spot on. I just wrote about this on another board. Debt issues addressed, this stock is a buck if not higher on spec euphoria. Actually with this same debt (before everyone piled on the BK bandwagon and price it in @ .11), the post buyout SP revalue was 1.50. Most people who are small, conveniently forget that. And to that point...JAMES my man!!! What, did someone forget to wipe your nose and tell you that SIRI has ALWAYS been a spec stock? You big dope. Good riddance! Who needs you?

    Slick Rick. Good artlcles lately. You've been more fair and that's all anyone can ask. Later...

  • Report this Comment On January 30, 2009, at 11:28 AM, jgoodman1 wrote:

    I am confused about several things. First, isn't Rick the one that has always pointed out that SIRI traded significantly higher with a fraction of the subscribers? SIRI currently has 20 million subscribers, which appear to be very loyal. Isn't the ability to refinance and eventually payoff the existing debt the key to the sucess of this company. Why walk away now? If Mel is able to succeed this will become a very profitable company. Second, SIRI has recently been able to swap debt for equity on several occassions. If I am a bond holder and I believe the company is going to go bankrupt why would I swap my bonds, which have some value, for worthless stock? SIRI actually has $24 million due on Monday, which I was told by the company is going to be paid. That leaves I believe about $150 million due in February, which I was told can be extended for another 30 days. Which brings us to cash and cashflow. At the end of the 3rd qtr the company reported cash of $360 million. If they were cashflow breakeven for the 4th qtr, which may be possible given the cost cutting that has been implemented. So, if they have to they could payoff the remaining balance of the debt that is coming due now. Mel has already said that the $350 million due in June will be rolled over. Finally, let's look at subscribers. Everyone agrees that the growth in subscribers has been solely driven by the OEM channels and not the retail channel, and that the car industry is in the worst slump in 20 or 30 years. Ok, let's do some simple math. If the total auto sales for 2009 are 10 million and there is a 50% penetration of satellite radio that would yield 5 million potential subscribes, but only about 50% of the free subscriptions are rolled over, also factoring in churn, the company could easily add another 2 million subscribers in 2009. That would make the company cash flow postive and give them the ability to refinance the remaining debt coming due this year and to start to paydown the debt. As the debt load becomes more managable, the economy starts to recover, auto sales pick up, and the company starts buying back stock. I could be completely wrong, but at $.11 per share its worth seeing how this plays out.

  • Report this Comment On January 30, 2009, at 10:05 PM, sl6209 wrote:


    Great post. Have a few questions if you don't mind...

    1. I was under the impression that the only repayment schedule for the GS 2 1/2% Notes was Feb 15. And that SIRI has been voluntarily offering up share traunches. Are you saying there have been payment schedules (including Monday), prior to the 15th? And that the recent D/E swaps on the bonds have been mandatory payments by a certain date? And agree on why GS would be accepting "worthless" common if they didn't believe it would become worth more than the bonds.

    2. When you are citing Mel saying he already has approval to roll over the $350M (actually due May 9th) of XM bank facility (250M w/JPM), what is your reference for this? I do believe this will happen since they have no debt due in 2010, but I was just wondering if you heard something recently. Some of us were waiting for that 3/1 timeframe he gave at the meeting for confirmation on that.

    3. Also, you said the 24M to be paid on Monday, you were "told by the company it will be paid." What can you disclose about how this information was obtained.

    4. And that the Feb 15 has a 30 day extension...anything on where that info came from?

    Thanks. And yes, you are correct. .12 at this timeframe is worth it.

  • Report this Comment On February 01, 2009, at 12:02 AM, dumbanalysts wrote:
  • Report this Comment On February 01, 2009, at 10:57 PM, cos1000 wrote:

    The Barclays analyst also ended with this:

    Not so helpfully, the analyst concludes, "Our final rating on SIRI is 1-Overweight," with a price target of 1.80.

    Obviously, Ratcliff feels that the stock is on priced for disaster.... what happens when Bankruptcy is not sought and the debt for Feb and May 09 are resolved??

  • Report this Comment On February 01, 2009, at 11:03 PM, cos1000 wrote:

    sorry can't get the link to work from here

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