Sirius XM Radio (NASDAQ:SIRI) is winning over converted skeptics this week, after a pair of analysts hopped on the bullish bandwagon with buy recommendations and $1-per-share price targets.
Lazard initiated coverage with a "buy" rating yesterday, encouraged by the satellite-radio giant's improving cash flows and its ability to keep subscriber churn in check despite rolling out a series of new fees last year. Wunderlich Securities followed suit this morning. Analysts at both firms have established $1 price targets on the shares, which is more important than simply being the going price for double cheeseburgers at the "dollar menu" fast-food chains these days.
Buck-back mountain
Lazard and Wunderlich analysts aren't the only ones banking on seeing Sirius XM shares trade for at least a buck apiece. Investors are also hoping that their stock price reaches the left side of the decimal point -- sooner rather than later.
Nasdaq sent out a delisting notice to Sirius XM four months ago, when it informed the media company that it had 180 calendar days to get its stock up to the $1 mark if it wants to continue trading on the exchange. Mid-March is looming, even if a date with the gallows is unlikely.
Sirius XM may very well appeal the decision, in hopes of buying a few more months of time. It has also approved a reverse stock split -- a zero-sum operation that would satisfy the exchange's requirement, which seems ridiculous given Sirius XM's gargantuan market cap.
Bulls will no doubt hope that it doesn't get to that point. The fundamentals seem to improve with every company-issued press release. However, the stock chart since the delisting notice went out is quite sobering. Sirius XM has done nothing but put out good news over the past four months, yet its stock price has gone from $0.69 when it received the notice to just $0.71 as of yesterday's close.
Sirius XM was one of the most explosive -- and volatile -- stocks in the months following its $0.05-per-share bottom last February. Things have cooled lately. The past four months have seen the stock trading between $0.51 and $0.74. That's a wide range on a percentage basis, but it still leaves the radio heavy with a lot of ground to cover over the next seven weeks.
Reversing perceptions
There's nothing wrong with a reverse split. Priceline.com (NASDAQ:PCLN) has been a big winner since its 1-for-6 reverse in 2003. Two of last year's bigger reversers, AIG (NYSE:AIG) and Coeur d'Alene Mines (NYSE:CDE), are trading marginally higher today.
And let me go out and say it: Even if Sirius XM does manage to move past a dollar a share, it may be in its best interests to go through with the approved reverse split anyway. If Sirius XM wants to attract more institutional investors and mutual fund managers, it would probably need to get its stock into at least the mid-single digits. The fundamentals are probably several years away from justifying an enterprise value in the $35 billion range.
That doesn't mean all funds are shying away from the Sirius XM experience, though. "When we model out the financials going forward, we see a real ramp-up in earnings and free cash flow beginning in 2011," Chris Arbuthnot told TheStreet.com this week. He manages the John Hancock Global Opportunities Fund. Sirius XM Radio is one of its holdings and contributed to last year's big gains.
However, there's still a lot of veto power out there when a stock is trading too low -- or even too high. It's not a coincidence to see Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) off to the races today. Its B shares are going into the S&P 500 index, just days after completing a 50-for-1 split. The Burlington Northern buy clinched the deal, but it would have been tough for smaller indexers to weight 500 stocks accordingly with Berkshire's B shares trading north of $3,000.
In the name of love
Reverse split or not, it's clear that sentiment continues to turn in Sirius XM's favor. It's a lot easier for analysts to fall in love with the stock these days, now that the media giant is the target of credit-rating upgrades as it projects growing subscriber counts and free cash flow levels.
In other words, there are fewer risks in singling out the potential rewards of ownership. Whether the stock makes it to the $1 mark in a few weeks is almost immaterial at this point, regardless of the Nasdaq's egg timer and wagging finger.
The party's just getting started -- and it's refreshingly crowded.
