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Hey, Now! Sirius More Attractive Than Ever (Update 3)

Updated from 12:37 p.m. EST to include additional analyst comments in the fourth paragraph and portfolio manager comments in the sixth paragraph.

NEW YORK ( TheStreet) - Sirius XM Radio (SIRI - Get Report) is a battleground stock for several reasons. After years of battling down debt, and seeing the return of a healthy car market, analysts think there is some "serious" upside in Sirius.

CEO Mel Karmazin has been in the top spot at the satellite-radio company for nearly a decade, and has transitioned the firm from one that was heavily reliant on point-of-sales service to being reliant on the new car market.

Karmazin and his team has been regarded as a smart, financially motivated management team, similar to Liberty Capital's John Malone. Liberty owns 40% of Sirius. "It's going to be a free cash flow machine, and I think Sirius will trade at a premium to the market multiple on a free cash flow basis. Paying 15 to 20 times free cash flow for Sirius over the next few years is not a crazy idea," said one hedge fund manager who declined to be named. "It's pretty realistic to think it [Sirius] could see $3 in a short period of time."

Barclays Capital analyst James M. Ratcliffe wrote that he believes free cash flow will be approximately $420 million in 2011, but jump to $710 million in 2012, as subscribers increase and capital expenditures fall.

Automakers such as Ford (F - Get Report), GM (GM - Get Report) and Chrysler have seen strong sales in recent months, as the industry turns around thanks to a strengthening economy. Ford reported a 7% rise in January sales, while Chrysler sales rose 44%. GM sales fell as the Detroit-based automaker cut incentive spending.

Craig Hodges, co-portfolio manager of Hodges Small Cap Fund (HDPSX) said that he has been impressed with Sirius' subscriber growth, and they company is coming out with a few new products that will benefit the company. "The car industry is getting pretty healthy and they will benefit from that as well," Hodges said over the phone. He no longer has a position in the stock, having taken profits. He said he is looking to get back into Sirius.

Maxim Group analyst John Tinker believes Sirius is getting more attractive thanks to its first price increase in 10 years and their dominance in the new car market. The company recently raised prices from $12.95 per month to $14.49 per month, and there has been no backlash, Tinker said. "They [Sirius] are the only paid radio service, and car sales are picking up," he explained. "They are in 65% of new cars at the beginning." Tinker has a Sirius buy rating and a $3.20 price target for 2013, up from $2.50.

The company could also move into the pre-owned car market where Barrington Research analyst James C. Goss believes Sirius could capture significant market share.These cars tend to have the satellite radio system already built in and are "targeted to a customer base possessing financial means and premium tastes. Goss rates shares outperform with a $3 price target.

Debt, however, has been a major concern in the past, as the company spent to acquire content, most notably the $500 million, 5-year contract with Howard Stern. Other examples include deals with the NFL, Martha Stewart, and Oprah Winfrey.

Tinker noted that Sirius' debt is now under control, and the company is more likely to return cash to shareholders via a buyback or a dividend. "Cash flow growth is really solid, and the question now is what should the balance sheet look like. Should they buy back stock or pay a dividend?" he noted. The company also has an $8 billion net operating loss, meaning Sirius will not pay taxes for several years going forward.

As the price increase helps free cash flows, investors expect margins to tick up. EBITDA (earnings before interest taxes, depreciation and amortization) margins are currently in the low 20's, and Tinker said he expects them to move towards the low 40% range over the next few years.
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