XM, Sirius Sending a Stronger Signal

Heartened by financial reorganizations that are in the works, equity investors have turned optimistic about the satellite radio business in recent days.

A little too optimistic, perhaps.

Since the first of the year, shares of XM Satellite Radio (XMSR) have risen 79%, while stock in competitor Sirius Satellite Radio (SIRI) has nearly doubled. The moves have been fueled by investors' confidence that the financial restructurings in the works at the cash-burning companies will put both on firmer footing.

But, argues one short-seller, the value that equity investors are assigning to Sirius, for one, is far greater than the value assigned to Sirius stock by its bondholders, who are expected to own a majority of the company if and when its restructuring is complete.

Furthermore, argues the same short-seller, shareholders in XM are valuing that company at an even higher level than they do Sirius -- a disparity, he says, that's unjustified despite XM's considerable head start over Sirius in getting paying subscribers to use its service, among other perceived strengths.

To be sure, the short-seller -- who spoke on condition of anonymity -- has an obvious motivation for contending that both stocks are overpriced. Last week, he was betting that XM's shares would drop and its bonds would rise, and he said he was readying a similar strategy for Sirius.

But the short-seller's argument highlights two points that are much easier to defend. One, as has been the case during the telecom meltdown, it behooves shareholders to know which way the wind is blowing in the bond market, because bondholders are often more sensitive harbingers of gloom than shareholders.

And two, the perennially challenging job of valuing companies gets even harder in cases such as those of Sirius and XM. For both companies, profitability is off in the future, and shifting capital structures require investors to make assumptions about more than the usual number of variables.