Auto Sales to Drive SiriusXM Past Liberty Media M&A Chatter (Update 1)

(SiriusXM story updated to reflect additional analyst comments and earnings estimates)

NEW YORK ( TheStreet) -- Three years after catching the market bottom with a 40% stake in SiriusXM ( SIRI), Liberty Media ( LMCA) chairman John Malone would likely concede that the easy money has been made on the satellite radio giant.

Investors who've watched SiriusXM gain roughly 1,500% since a March 2009 bottom would be wise to have the same perspective, as speculation of a Liberty Media buyout has driven Sirius shares to a near 30% gain in 2012. In fact, long-term SiriusXM investors may benefit more from keeping an eye on auto sales as a source of subscriber growth while tuning out what could be an uncertain and complicated prospective buyout by Liberty Media.

In March 2009, Liberty Media took a 40% stake in SiriusXM after providing the company with $530 million in bankruptcy-averting financing. The "bailout" paved the way for a Sirius share recovery from 14 cents a share to $2.35. A standstill agreement that prevented Liberty Media from increasing its SiriusXM stake expired after three years, and on March 20, a petition to the Federal Communications Commission paved the way for Liberty Media to build a controlling stake in the satellite radio company.

Deal speculation centers on whether Liberty Media will look to buy SiriusXM through a merger and tax-free spinoff transaction called a Reverse Morris Trust, or through a direct acquisition to take advantage of billions of net operating losses NOLs . However, the petition and a subsequent request by SiriusXM to block the prospective stake increase revived speculation of a takeover by the highly acquisitive Liberty Media, and portrayed two companies at odds over the M&A end game.

In February, anticipating the end to Liberty Media's lockup, Citigroup analyst Jason Bazinet made the argument that M&A could drive SiriusXM's stock in 2012, justifying a "buy" rating and $2.50 price target. However, Bazinet's expectations for a deal have changed slightly as a result of Liberty Media and SiriusXM's recent FCC petitions. Now a merger and tax-free spinoff seems remote because of the hostile relationship between the two companies and, instead, Bazinet sees Liberty Media bidding for a controlling stake.

" The lack of Sirius cooperation suggests Sirius management is doing its best to ensure its shareholders receive a control premium from Liberty," adds Bazinet in a Monday note.

Analysts covering Liberty Media highlight a SiriusXM stake increase as a likely pre-cursor to a takeout. "We continue to believe Liberty inevitably increases its stake in SIRI above 50% prior to an inevitable merger," wrote Jeffrey Wlodarczak of Pivotal Research in a February note, citing $9 billion that the company can use for share buybacks or acquisitions like Sirius and LiveNation.

"In the valuation of SiriusXM's stock what is priced in is a full majority stake by Liberty Media," says Martin Pyykkonen, an analyst with Wedge Partners, adding this makes SiriusXM shares a risky proposition at current prices, especially since Liberty Media isn't compelled to cut a deal anytime soon. Nevertheless, he expects SiriusXM's earnings and a lack of direct competitive threats from Pandora Media ( P) and Spotify to eventually justify current share prices.

After SiriusXM lost a record $5.3 billion in 2008, the company turned to a small profit in 2010, which grew to $427 million in 2011. The company is expected to see its profit grow to $543 million in 2012 on a near 25% jump in revenue to $3.4 billion, according to consensus analyst estimates polled by Bloomberg.

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On Tuesday, Chrysler said that its U.S. auto sales increased 34% in March, while Ford Motor Company ( F) said sales rose 5% for the month. The world's largest automaker General Motors ( GM) said that U.S. sales increased 12%. Overall, consulting firm LMC Automotive projects that March auto sales will rise 6% in the U.S., to the highest levels since May 2008, prior to the financial crisis.

SiriusXM shares are up over 29% year to date and over 40% in the last 12 months. In Tuesday trading the company's shares fell more than 3% to $2.33. Currently, analysts polled by Bloomberg give the company an average price target of $2.51, with eight "buy" recommendations, four "holds" and two "sells."

"I think if you strip out the valuation question and ask fundamentally, are they doing well? Yes, they are doing well," Pyykkonen said. He notes that in the used car market the company's satellite services may double in the next three-to-five years. With SiriusXM just beginning to leverage used car dealer networks to convert previously installed satellite chips into new subscribers, the company may have a strong base of prospective subscribers even if new car sales don't maintain current growth rates.

"You can make the argument that even without a deal, if you hold Sirius for two to three years, the used car market could justify that valuation."

Miller Tabak analyst David Joyce downgraded SiriusXM shares from "buy" to "neutral" in a Tuesday note on valuation concerns, as the company's stock rises near his $2.55 price target. "At the current price including the conversion of Liberty Capital's preferred, the stock appears to be close to fully-valued," writes Joyce. In addition, Joyce says that M&A threats lessen the prospect of SiriusXM launching share buybacks. Overall, the company has 3.76 billion shares, meaning that its $2.35 share price still gives SiriusXM a near-$9 billion market cap.

Joyce echoed the argument that the company is headed in a positive direction on strong auto sales and improving finances, regardless of the M&A speculation. "SIRI benefits from factory-installed promotional period radio subscriptions, that could have a ~45% conversion factor later in the year," notes Joyce. He expects that the company will see revenue grow 12.5% to $818 million in the first quarter on 162,000 new subscribers.

In 2011, SiriusXM turned free-cash-flow positive after burning cash throughout the financial crisis and just recently raised monthly subscription prices for the first time in the company's history.

For more on M&A, see 5 deal ready stocks loved by hedge funds portfolio's.

-- Written by Antoine Gara and Chris Ciacia in New York