This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...
Ten days after my Foolish colleague Rick Munarriz posed the question "What's next for Sirius XM (Nasdaq: SIRI)?" we finally have the answer.

A downgrade. And a buck-a-share. And maybe, not even that.

No biscuit for you, Dogstar
Monday opened on a down note for Sirius shareholders, as "Wall Street Best" stock picker Wunderlich downgraded the satellite radio operator to hold and predicted that the stock will stay stuck at a buck (a share) for the duration of 2010. Investors are responding to the downgrade in kind, selling off Sirius to a bit under Wunderlich's target price -- as well they should.

After all, this isn't any no-name, worse-than-no-rep analyst we're talking about. With more than 100 recommendations to its credit, Wunderlich already ranks in the top 10% of investors tracked by CAPS, boasting multibagger gains on recommendations such as ATP Oil & Gas (Nasdaq: ATPG) and McMoRan Exploration (NYSE: MMR). It's no slouch in the media sphere, either. Despite picking the occasional dog of an investment ...

... Wunderlich gets most of its recommendations in this sector right, including winners such as:

And now Wunderlich's telling us that Sirius is a real dog of an investment, but why?

Sirius goes for a ride
Basically, because Sirius is a dog. It loves to go for car rides, masking the cost of its pricey satellite radio services underneath the all-inclusive price tag of $25,000 automobiles. Problem is, this strategy depends heavily on the cars selling in the first place, and according to Wunderlich, car sales after Cash for Clunkers may not set the highway on fire this year.

Sure, we could see a shift in sales away from troubled automaker Toyota (NYSE: TM) and toward Ford (NYSE: F) and General Motors -- but because Sirius already counts all of these automakers among its customers, a shifting of sales from one automaker to another won't necessarily benefit it. It needs to see total, aggregate auto sales remain strong to profit from the industry. And in the middle of the Great Recession, with nearly 10% unemployment across the nation, that's going to be a tough trick to pull off.

Foolish final thought
But what if Sirius does pull off this brilliant pet trick? Running the numbers last week, and positing a conversion of Liberty Media's preferred stake into common shares, The Wall Street Journal marveled at the valuation being accorded to Sirius shares -- 18 times earnings before interest, taxes, depreciation, and amortization (EBITDA). According to the Journal, Sirius is more likely worth something like eight times EBITDA, "higher than cable-TV operators, a somewhat similar business."

Says the Journal, even if Sirius does manage to grow its customer list -- whether through car sales holding firm, or through expanding its share among more pedestrian consumers -- a valuation multiple of eight times would have Sirius selling for about $0.25 per share.

In which case, rather than receiving hate mail, Wunderlich may deserve a thank-you note from Sirius shareholders. In rating Sirius a hold, Wunderlich may have been too kind to this dog.