Editor's note: This Stocks Under $10 alert was originally sent to subscribers April 12 at 12:14 p.m. EDT. It's being republished as a bonus for TheStreet.com and RealMoney.com readers.


Sirius Satellite Radio ( SIRI) is arguably one of the most popular companies in the Stocks Under $10 universe. We last wrote about the company in December and have been negative on the stock for sometime. With shares now trading down at our $3 target price, it's time to revisit Sirius -- to see if the stock offers any long-term potential for investors.

When we first wrote about Sirius, our thesis was that its subscriber estimates were too aggressive and that satellite radio was no longer the "must have" product for consumers. We still believe the future is cloudy in this regard; however, the playing field has changed.

On Feb. 19, Sirius and XM Satellite Radio ( XMSR) agreed to merge in a deal that would create one giant satellite radio company with roughly 14 million subscribers. If the deal is approved, the merged entity would create cost synergies and reach profitability much more quickly than XM or Sirius would independently.

However, there is some concern that the Federal Communications Commission could rule against the merger -- given that Sirius and XM are the only two companies that have been granted satellite-radio licenses. The Justice Department also would have to sign off on the deal. These hurdles have caused Sirius' share price to fall to a 52-week low of $3.07, with shares recently trading at $3.10.

Opponents argue that the FCC would lose face if the merger were to go through because the regulatory agency shot down a proposal in 2002 when satellite TV firms DirectTV and EchoStar Communications wanted to merge to better compete with cable companies. The FCC ruled then that the combined satellite TV entity would create a monopoly and not be in the best interests of the consumer -- a very similar situation to the Sirius/XM proposal. But both Apple's ( AAPL) iPod and traditional radio could be viewed as competitors, so overall we do not see the merger between XM and Sirius as a monopoly.

Advocates believe that the combined Sirius/XM entity would be in the best interests of the companies, shareholders and consumers. We agree the merger would potentially benefit both companies and their shareholders, given that the share price for Sirius and XM is likely to move higher. But the key question for the FCC is whether the deal will be in the best interests of consumers.

XM and Sirius have said they plan to offer an "a la carte" subscription that would give consumers fewer channels than either SIRI or XM offers now for $12.95 a month. So we don't see a benefit to consumers in terms of price.

As for content, Sirius has 134 channels covering almost every genre of music, sports, and talk shows while XM has 170 channels under their existing $12.95 plans. Intense competition between the pair is responsible for creating this wide array of channels, and we do not see the benefit of the merger for consumers because having 134 stations -- or 170 for XM subscribers -- already provides plenty of diversity for listeners to choose from.

In our opinion, the "a la carte" pitch is a last-ditch effort by Sirius and XM to get bailed out by an FCC approval of their merger after years of spending money irresponsibly. In the past, the companies have sunk as much as $500 million into a single contract and spent freely on advertising and discounts to woo subscribers away from each other.

From a common sense standpoint, it seems as if XM and Sirius are pushing the deal hard for fear that a slowing business model and high costs could push both companies close to bankruptcy. If this is the case, we do not believe that a merger will take place because it poses no benefit to the consumer.

On a valuation level, Sirius may look cheap based on its stock price, but it has 1.46 billion shares outstanding and a market capitalization of $4.5 billion -- comparable to the market caps of Hasbro ( HAS), one of the largest toymakers; or Centex ( CTX), one of the nation's largest homebuilders. Moreover, Sirius is EBITDA and free-cash-flow negative on a trailing 12-month basis, and has more than $1 billion in debt with only $415 million in cash.

At the end of 2006, Sirius' subscriber base had grown 82% year over year to more than 6 million, but much of this gain could be attributed to the signing of Howard Stern. That positive catalyst, however, has already been reflected in subscription numbers, as well as Sirius' share price in late 2005.

On Dec. 5, 2006, Sirius lowered its subscription estimates, just as we had predicted. And looking ahead, we see the potential for future warnings because of competition from Apple's iPod plug-in for cars and the fact that Ford ( F) and DaimlerChrysler ( DCX) -- two of Sirius' largest customers -- continue to cut their production.

In short, we believe that investors should avoid buying Sirius even at this level. Other than the possibility of a merger -- which will not be decided anytime soon -- we see few catalysts on the horizon for Sirius. Investors can find better situations that have lower risk and better reward potential in our Stocks Under $10 model portfolio.

In keeping with TSC's editorial policy, Frank Curzio doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Frank X. Curzio is a research associate at TheStreet.com, where he works closely with Jim Cramer and and writes TheStreet.com Stocks Under $10. Previously, he was the editor of The FXC Newsletter and senior research analyst for Greentree Financial, and passed his Series 7, 63 and 65. He appreciates your feedback; click here to send him an email.

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