Sirius XM's Rebound: Why Now?

(Sirius XM story updated with recent stock price movement, additional analyst insight and Sirius XM Nasdaq hearing)

NEW YORK ( TheStreet) -- Analysts are conflicted about their views on Sirius XM ( SIRI), with some skeptical about the company's soundness as a stock investment -- and others wholeheartedly confident of its financial strength.

BGB Securities analyst Murray Arenson, for example, likes the company. "I think it's growing and I think the outlook is strong. You've got a very larger subscriber base growing" and "a rebound at this stage of the game on auto sales."

Arenson adds that though the prevailing view seems to be that Sirius star Howard Stern and Sirius will work out an agreement as his current contract expires at the end of 2010, "I think Sirius will be financially okay" regardless of the outcome. "Sirius is in a strong place. It is a healthy, vibrant company."

Sirius XM stock, after rising 0.9% to 88 cents a share Friday morning, is slightly down just after noon, at 87 cents.
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Sirius XM stock had finished Monday's trading session up about 4% to 86 cents after sliding 3.1% to 80 cents Monday morning. Many market observers believe the rise in volume had much to do with the addition of Sirius XM to the NASDAQ Q-50 Index, effective at the market open Monday.

Arenson says this is probably one good reason why the stock shot up that day, "but may not explain it all," given that the stock has been volatile with many moving pieces, including its recent Nasdaq delisting notice and the company's application to get an extension.

"I think they've got a strong argument," to get an extension, Arenson says. On March 17, Sirius announced that it received a letter from the NASDAQ stating that the company has not regained compliance with the $1 minimum; Sirius XM said that it would ask for continued listing on the NASDAQ pending its return to compliance, while noting that its equity capitalization is greater than about 92% of the companies listed on the NASDAQ Global Select Market.

Today, Sirius XM announced that that the NASDAQ has scheduled a hearing on April 29, at which the company will have the opportunity to request continued listing on the NASDAQ pending its return to compliance with NASDAQ's $1 per share bid price requirement.

The BGB Securities analyst, like many others, have a positive take on Sirius XM stock. But not everyone agrees with it. In fact, Morningstar analyst Michael Corty on March 22 came out with a note saying "we've changed our uncertainty rating for Sirius XM to extreme from very high. The outlook for Sirius' annual cash flows remains very difficult to forecast with precision."

Corty's concerns in part stemmed from the company's competition with the widely free terrestrial radio and his expectation of "emerging competition for audio service in vehicles."

Corty also said he doesn't like the fact that the company has a heavy debt load of $3.1 billion: "While its recent debt issuance of $800 million allowed Sirius to extend some of its maturities, the company will still need to access the credit markets in the future."

If Sirius XM runs into problems when it's more difficult to tap into credit, Corty noted, "shareholders could be severely diluted again." Morningstar's current valuation is based on 6.5 billion shares outstanding, assuming Liberty Media changes its preferred shares to common shares.

"Sirius XM Radio lacks an economic moat as terrestrial radio is a substitute product widely available for free, and emerging alternatives for audio content will pose additional competition for the company," Corty writes.

From a long-term perspective, Gabelli & Company analyst Brett Harriss says that Sirius XM is "a great company" that's "incredibly scalable -- it's got incremental margins of 75 to 80%, and it's got very limited competition." Like others, cites Sirius' primary distribution channel -- autos -- and the recovery signs of the industry. "If its SAAR (seasonally adjusted annual rate) rebounds from 12 million now to 15 million -- and keep in mind it stayed at 17 million for five or six years -- the amount of subscribers will go up ."

Harriss believes that Sirius XM's pricing power will increase, and that the company can start raising prices in 2011. "They've got satellites up, so their CAPEX (capital expenditure) will come down significantly from now to 2012; so they can generate a lot of free cash."

In the meantime, the threat of free radio on Sirius XM's growth is downplayed by Harriss, who cites the company's strength as a commercial-free radio entity. "I think anyone who spends more than an hour a day in car would be willing to pay 12 bucks a month not listening to commercials and listening to music ... and they've got premium content."

-- Reported by Andrea Tse in New York

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