3 Reasons Sirius XM May Stay Above $2 This Time

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Shares of Sirius XM Radio (Nasdaq: SIRI  ) have closed at $2 or higher for three consecutive trading days. This is actually the first time since early August that the stock has traded in this territory, and rightfully jaded investors have a good sense of history.

The summertime fling that found the stock perched above the $2 mark lasted a little over a month. That run came after a springtime rush that treated investors to a late May high of $2.44 that proved fleeting after several weeks of glory.

Here we are again.

Bulls will argue that it's different this time. Bears have history on their side.

I'll cut through the suspense and serve up a few reasons this rally may stick.

1. Sirius XM really is cheaper this time
Sirius XM turned heads when it became a profitable company two years ago. Now the satellite radio giant is simply padding its bottom-line results.

Earnings multiples have a neat way of contracting when a growing company has a stagnant share price.

Let's try Sirius XM on for size. Analysts see the media maker earning $0.07 a share this year after closing out 2011 with a projected profit of $0.06 a share.

Just a penny? Not exactly. This represents improvement of 17%, and that goes for earnings growth and P/E ratios if the share prices remain constant. Analysts now see Sirius XM earning $0.10 a share come 2013 and $0.17 a share come 2014. These are material targets for a stock trading at $2 and change these days, and the fact that we're now ankle deep in 2012 brings us closer to those meaty milestones.

2. The competition came; it didn't vanquish
The bearish knocks on Sirius XM are fairly obvious. Cynics can't knock the company's lack of profitability or free cash flows now, so the bogeyman becomes the future.

Pandora (NYSE: P  ) went public in mid-June, as Sirius XM was on the rebound between its spring and summer flirtations with the previously unsustainable $2 price point.

Streaming music through Pandora is a popular pastime. The dot-com speedster is serving up more than 2 billion hours of music a quarter. It's also making it work on the bottom line, coming off of back-to-back profitable quarters.

Where are the other threats? Dashboard technology and the surprising speed that finds automakers incorporating a growing smorgasbord of ear candy for drivers with Bluetooth-enabled smartphones is astonishing. Have you seen commercials featuring Toyota's (NYSE: TM  ) Entune? Pandora and Clear Channel's iHeartRadio are two of the six options available when the touchscreen system boots up. In other words, satellite radio isn't just competing against commercial-laden terrestrial radio stations anymore.

The 2011 arrival of Entune and Pandora's stellar growth should have dealt Sirius XM a blow, but it didn't. CEO Mel Karmazin revealed that the company closed out the year with a better-than-expected 1.7 million more subscribers.

Companies vying for aural attention will continue to grow in number. Their strategies and success bear watching. However, as long as Sirius XM is growing -- the way it has over the past year and a half as many new technologies have arrived or expanded -- the competition isn't a problem.

3. It's going to be a good year
I went over four things that Sirius XM must do this year to keep the good times coming. This doesn't involve any kind of heavy lifting on Sirius XM's part. It just needs to see the seeds it's planted sprout.

Sirius XM will be raising its basic monthly rate by a reasonable 12% to $14.49. Sirius XM 2.0 is here, and the promising Lynx receiver hit the market two weeks ago. It's up to Liberty Capital (Nasdaq: LMCA  ) to see if it wants to grow its 40% preferred share stake in Sirius XM, but the ups and downs of speculation should keep the stock mostly buoyant in anticipation.

If the market tanks, all bets are off. Sirius XM is a high-beta stock, and it won't react favorably if the market's volatility deals investors a sharp blow to the downside.

However, Sirius XM's valuation, recent history, and promising future should support its share price. Sirius XM is cheaper and packing a more sustainable model than you probably think.

Sirius trophy wife XM was once a recommendation in the Rule Breakers newsletter service. The growth stock service has identified a hot new multibagger. You don't need a subscription to check out the free report, but it won't be around forever, so check it out now.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story, except for Liberty Capital. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

Read/Post Comments (5) | Recommend This Article (9)

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 10, 2012, at 3:51 PM, 67vair wrote:

    You are correct sir!

  • Report this Comment On January 10, 2012, at 4:33 PM, Austin77478 wrote:

    Mint analysis, Rick!

  • Report this Comment On January 11, 2012, at 10:35 AM, CJonpoint wrote:

    Sirius has started the new year off with a bang! It's new Sirius XM 2.0 and Lynx receiver are a huge hit! The new receiver allows 200 hours of music storage, 25 channel programming, 5 hours of playback, one touch to start current song from beginning and a plethora of additional features. The Lynx has sold out three times since Christmas. I just checked the site and they are in stock again, but it won't last long. The last frenzy I saw like this was for the Apple iPhone.

  • Report this Comment On January 12, 2012, at 3:40 PM, kmacattack wrote:

    Right on, Rick, once again. Your analysis is exactly in line with what I believe. The only "headwind" SIRI might face, as far as the stock price, is a broad market collapse, which seems less likely every day. In spite of all the phony "debt ceiling" crisis last year, SIRI continued to grow in subs and in profitability, because, they are, as we all know, the absolute KINGS OF AUDIO ENTERTAINMENT. There is absolutely no one who can come near SIRI for quality of content. Who wants to listen to a crappy radio station, even if it's "FREE".? With every new sub, SIRI's dollar profits and profit margins increase, because their costs are overwhelmingly FIXED, and they covered that "tipping point" about 2 years ago when they passed 16 million subs. I think we are easily looking at a $3.00 share price by year end, $4.00 if the economy continues to improve, and $8 within 3 to 4 years as institutional investors begin to look at SIRI's money making machine. Even if Mel decides to retire in a year or two, he's already worked his magic. The company could almost run itself at this point. They need to just keep doing what they are doing, innovate a little bit with products like 2.0, and expand gradually into foreign markets WITHOUT RISKING a lot of capital to do so. They can experience a huge sub growth by just successfully marketing with used car dealers to turn on the 20 million or so idle SIRI radios already installed by giving away 90 day subs. Most of these "freebies" are going to convert to paid and once they are used to listening to SIRI, they won't be satisfied by listening to anything else.

  • Report this Comment On January 14, 2012, at 4:02 PM, jm31563 wrote:

    I've liked this stock since I began investing in it last year. Many naysayers along the way thought this company would be pummeled by their competition. As all have seen that has not been the case! I had a strong feeling last year this company would grow and become stronger and my hunch was right. I will continue to invest in this company as it ascends to the company it will be. A great one.

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