Is Sirius XM Going to $1.40?

Skeptics continue to shed their cynical skin when it comes to Sirius XM Radio (Nasdaq: SIRI).

Maxim Group's John Tinker is the latest analyst to warm up to the satellite-radio provider. He initiated a "buy" rating, setting a price target of $1.40.

Is this a realistic target? One has to go back 23 months to find the last time that Sirius XM's stock traded that high. However, it's not as if Sirius XM itself was worth more. The company  commands a larger enterprise value today at $1.00 per share than it did two years ago at $1.40 per share, largely the result of Liberty Capital's (Nasdaq: LCAPA) 40% preferred-share stake.

We can go even further out -- to when shares of Sirius peaked at $9.43 six years ago -- and it's still a more valuable company today. Sirius hadn't merged with XM at the time, and if we go back to the double-digit glory a decade ago, that was when there was a sliver of today's billions of shares outstanding.

Despite the dilution, there's a major shift in the way analysts are approaching Sirius XM these days. Instead of hanging their valuation models on pie-in-the-sky potential, they can now lean on real numbers.

Tinker didn't just whip up the $1.40 target out of thin air. He figures that Sirius XM's enterprise value is worth 14.5 times what he expects in EBITDA next year.

Real numbers. Real models. Real soon.

Sirius XM has earned its legitimacy. It has been profitable in each of the past four quarters. It's not a fluke. It's not temporary. All nine of the major analysts putting out profit forecasts on the company see it in the black next year, too.

Tinker feels that there is plenty of room for Sirius XM's penetration rate in cars to improve. The 19.5 million subscribers may sound like a beefy number today, but it's just a small fraction of the cars on the road. Ford (NYSE: F), GM, and other Sirius XM partners have financial incentives to keep the satellite receivers coming -- and then we have the used cars entering the market with dormant receivers.

One also has to wonder if there is pricing elasticity on Sirius XM's side. The media giant conceded to freeze its basic rates for three years in a move to win regulatory approval for its merger. Those chains come off next year.

So how much would you be willing to pay for premium radio? Satellite television heavies DirecTV (NYSE: DTV) and DISH (Nasdaq: DISH) charge several times over what Sirius XM charges, and this is essentially a monopoly. The rub here is that most people spend a lot more time at home than they do on the road. Penny-pinching commuters would cut the cord if there were a material hike.

Most analysts aren't modeling higher rates into their projections, so just take that as a welcome shareholder bonus if it does happen -- and if subscribers go alone with it.

In the end, the takeaway from Maxim's upgrade is that Sirius XM's recent financial performance is making it easier to crank out believable price targets. It wouldn't shock me to see Sirius XM appreciate by 40% over the next 12 months. It shouldn't surprise you, either.