The Option to Make Bank Is Available With SiriusXM

NEW YORK ( TheStreet) -- I started covering SiriusXM ( SIRI) last year with a March 2011 article. In the column, I described Apple's growing dominance in the smartphone space and how smartphones would impact consumer choices in content delivery.

As wireless Internet availability enters into the world of GM ( GM) and Ford ( F), the need for nonterrestrial delivery will wither. As demand for satellite delivery diminishes, Sirius will reach a point that maintaining the system outweighs the additional revenue gained.

The new Cadillac XTS offers a Bose studio surround with Pandora ( P) and Sirius via CUE. CUE allows up to 10 smartphone devices to connect via Bluetooth. Ford has similar technology including the ability to tag songs for later purchase in iTunes.

I have written several times before and continue to believe the costs of maintaining the birds in the air will go on rising at a faster rate than revenue from those who demand it. The transition creates a challenge for Sirius and may result in several quarters of nonrecurring writedowns; however, the transition is not a reason to avoid Sirius.

Barring a Black Swan event, the transition should not only proceed smoothly, but with predictability. More importantly for current investors, the transition is in the immediate future. Transitioning from satellite delivery to an Internet protocol method will not happen in a vacuum either.

Sirius's new entry into the world of Google's ( GOOG) TV demonstrates Sirius's commitment to moving forward into new delivery methods. The new app for Sirius was announced at Google's I/O developer conference in California last week.

Liberty Media ( LMCA) is likely to buy out Sirius long before the tipping point is reached, so a discussion about the death of satellite delivery may be a moot point. After Liberty's large purchase not long ago, I received comments about an article I wrote regarding valuation. Several comments stated the price of about $2.15 was now a floor in Sirius.

I understood why some may naively believe the stock must be worth $2.15 a share. "After all, if Sirius was good enough for Liberty to buy at $2.15 it must be good enough for anyone." Unless you're in a position to take advantage of the net operating losses like Liberty may, Sirius begins to lose its appeal above $2.15 relative to the downside risk. At $3 a share, the company is worth $11.4 billion.

The lack of a screaming buy at $2.15 isn't the same statement as "Sirius isn't a value at any price." In my March 2011 article, I stated writing $2 and $2.50 strike calls would be a good trade because of the limited ability for Sirius to trade above $2.50 relative to downside.

Sirius has a fantastic product lineup, and the shares had an impressive run from 2009, but like many trends up and down, became clearly overbought. The sky high price-to-earnings ratio would not support continuing earnings increases in relation to the size of the stock float. The dynamics of a stock float of over 3.65 billion shares creates an ever increasing headwind as the stock price appreciates. Keep in mind that Sirius's annual revenue is about $3.2 billion.

In comparison, take a look at Sprint ( S), another stock I follow and have from time to time recommended. When Sprint traded near $2, I recommended it. The ability for Sprint to double is much easier with a smaller float and market cap relative to revenue. Sprint has 20% fewer shares and 10 times Sirius's $3.1 billion revenue. Increasing the bottom line number is obviously much greater with Sprint than Sirius.

You don't need to double your money to make an investment a decent one. Both Sprint and Sirius offer the ability to profit. I believe the best way toward profits with Sprint and Sirius is through options. Friday's closing price of $1.85 or less is a buying opportunity with Sirius.

Sirius's shares in the last year have lost their over-exuberance and now earnings have caught up to the price once again. At $1.85, the price-to-earnings multiple has fallen into a exceptionally reasonable 18.5.

Sirius isn't a buy for a Liberty Media buyout, but if it happens, shares should appreciate significantly. Don't bet on it; a buyout may take longer than most imagine. Ford's recent agreement with Sirius to allow used Ford vehicle buyers a free trial period should create slightly better profits rolling forward. Don't count on a windfall, but it's as close to free money for Sirius as you can get. Most of each new dollar in revenue flows in the direction of the bottom line.

In May, I wrote an article suggesting Sirius is oversold at $1.80 with a price target of $1.97. I adjusted the buying zone based on support shifting higher to $1.85 in a follow up. At the current $1.85 price, the downside is limited relative to risk. You can pick up shares at $1.85 and write September $2 calls for a dime each. It lowers your cost basis to $1.65 and, if exercised, the gain is over 20% in about three months.

A 20% gain in three months is not easy with most stocks, but with Sirius, it's a real possibility. Using options provide an extra level of comfort, lower volatility, increased odds of success and profit if Sirius doesn't appreciate in value.

At the time of publication, the author held no positions in any of the stocks mentioned.

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