This Just In: More 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." While the pinstripe-and-wingtip crowd is entitled to its opinions, down here on Main Street, we've got some pretty sharp stockpickers, too. (And we're not always impressed with how Wall Street does its job.)

Given that, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We 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 worst ...
Is Janco Partners insane? Yesterday, Sirius XM Radio (Nasdaq: SIRI) reported a stunning fourth quarter loss to end its fiscal 2010 -- and a promise to disappoint investors again when it reports earnings in the current year. The news sparked an immediate, post-earnings sell-off. But no sooner had it begun, than out rushed Janco with an upgrade for the stock -- and a prediction the stock will climb 24% in price over the next 12 months.

Dismissing investor worries over underwhelming 2011 growth rates, Janco called Sirius's 2010 performance, at least, "solid." The analyst praised Sirius's decision to reup Howard Stern and the NFL, and predicted great things for "the anticipated launch of Sirius XM 2.0" (due out in H2 of this year). Says Janco: 2.0 offers "increased bandwidth ... additional content ... [and] the ability to purchase, pause, record, and play back music."

Not only that, but as our own Rick Munarriz recently pointed out, the new content is going to be available on an increasing array of devices. While Sirius owed much of its early growth to car companies like Ford (NYSE: F) and General Motors (NYSE: GM), who helped push the product into their dashboards, Sirius is no longer strictly a "car phenomenon." It's also inking deals to provide sat-radio content to consumers through their handheld devices, as Research In Motion (Nasdaq: RIMM), Apple (Nasdaq: AAPL), and multiple Android producers line up to add Sirius content to their lineups.

According to the analyst, all of this -- the new content, and the new channels for distributing it -- will help differentiate satellite radio from "terrestrial" radio for any music listeners out there who remain to be convinced. It could also help grow the subscriber count past its current level of 20.2 million souls.

Let's go to the tape
Impressed yet? If so, you're not alone. Sirius shares are already up nearly 8% off their post-earnings nadir. And while it's true that Janco has a somewhat checkered past in the business of picking media stocks ...

... and it's also true that the analyst has been wrong about Sirius before (such as when it told investors to buy the stock in early 2008 -- and sacrificed 44 percentage points the market as a result), the truth of the matter is that I'm actually right there with Janco on this pick.

Cash is king
Why? I know you'll be shocked to hear this coming from a value investor like myself, but the point at which Janco finally wins me over, is when it begins to crunch the numbers at Sirius -- and focus on the free cash flow.

According to Janco, you see, what's really great about Sirius XM today is that "the company is seeing cash flow consistently increasing over time." After generating $185 million in free cash flow in 2009, then $210 million last year, Sirius now promises to deliver cash profits to its investors approaching $300 million in 2011 -- a 62% increase in just two years. And that does impress me.

Foolish takeaway
When you consider that Sirius, a $7.2 billion stock expected to grow at roughly 30% per year over the next five years, is selling for barely 24 times free cash flow today, I find it hard to dismiss Sirius as "too expensive" today. Fact is, even if you add in the debt, and think of Sirius as a $9.8 billion enterprise, it doesn't look all that awfully overpriced at an EV/FCF ratio of 33 -- not with these kinds of growth rates fueling it.

Long story short, while I'm not 100% convinced that the stock is the steal of the century, I do believe that Sirius XM has proven itself to be a risk worth taking.