Did Sirius Just Bottom Out?

Are better days ahead for Sirius XM Radio (Nasdaq: SIRI  ) ?

Wall Street's wildest lottery ticket proved to be one of the few consistently resilient stocks during last week's volatile trading. After a sharp 11% plunge on Monday, shares of the satellite radio giant rose in each of the next four trading days.

The market may have rocked both ways during the week, but Sirius XM was the steady salmon swimming upstream:

  • Up 4% on Tuesday to $0.88.
  • Up 7% on Wednesday to $0.94.
  • Up 1% on Thursday to $0.95.
  • Up 5% on Friday to $1.00.

The news comes even as concerns mount over the company's ability to refinance three hefty debt repayments that are due next year. Four consecutive days of gains do not a turnaround make. However, maybe even Mr. Market is conceding that the stock's pummeling was overdone during the interminable merger process.

In short, if pessimism has hit rock bottom, there's nowhere else to go but up.

The upside of satellites
Satellite entertainment takes time. DirecTV (NYSE: DTV  ) and Dish Network (Nasdaq: DISH  ) weren't born profitable companies. It took heavy upfront investments and years of scaling for the satellite television duo to become profitable.

With 18.6 million subscribers, the combination of Sirius XM has created a larger membership base than either DirecTV or Dish. However, since the company is still early in its investment cycle, spending dearly on new subscriber acquisitions, and dealing in a service that has a much lower monthly sticker price than satellite television, losses have mounted.

If you're looking for positives, consider the following:

  • The company is already projecting that the cash flow tide will turn next year, with post-merger synergies resulting in $300 million in positive adjusted EBITDA in 2009.
  • The government's aggressive tactics to grease up the country's lending institutions will make it easier for Sirius XM to overcome next year's debt refinancing milestones in February, May, and December.
  • The possibility of a second economic stimulus plan would put more money into consumer pockets, at a time when relief at the gas pump may find consumers buying cars again. This is Sirius XM's biggest market, with deals in place for new cars from leading automakers like Ford (NYSE: F  ) and General Motors (NYSE: GM  ) to come with factory-installed satellite receivers.
  • Next month will introduce new pricing plans for subscribers, including the ability to pay $4 more a month to receive a cross-section of the best offerings from the rival service. Lower-priced plans will also be available for those who want to hear a more limited selection of programming content.

That last point is important. One of the reasons why Netflix (Nasdaq: NFLX  ) has been able to grow in this difficult environment with a similarly priced consumer-discretionary subscription service is that it offers several pricing plans. Instead of leaving Netflix because the unlimited plan with three rentals out at any given time no longer fits your DVD consumption patterns, you can scale down all the way to a $4.99 plan where you get two flicks in any given month.

Sirius XM will now have the flexibility to market at many different levels, likely to give it a higher customer retention rate over its current "one size fits all" plan.

The downside of satellites
What can go wrong? Well, let's just say that shares of Sirius XM are far more volatile than the previous four trading days may seem to suggest. Today alone, shares traded as low as $0.90 a share again.

Bottoming out is unlikely to be a smooth landing. There are still plenty of hurdles to conquer. However, if Sirius XM is able to deliver on its subscriber growth targets -- which call for its rolls to expand to 21.5 million members by the end of next year -- and the synergies come in anywhere near the company's ballpark estimates, creditors will be less nervous as the company navigates through next year's tollbooth trio.

Investors know the downside. It's a creditor collapse that would force the company into bankruptcy. However, like any good lottery ticket, the upside appears to be so much more than today's buck -- or less -- cover charge.

Besides, if last week makes a repeat performance, we already know what a sharp drop on Monday means.

More news than static on Sirius XM:

XM Satellite Radio is a former Rule Breakers stock pick. A free 30-day subscription will shed some light on why the satellite radio company made the cut before being cut. Netflix is an active Motley Fool Stock Advisor recommendation.

Longtime Fool contributor Rick Munarriz subscribes to both XM and Sirius. He does not own shares in any of the companies in this story, save for Netflix. 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.


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