Analysts Got It Right on SiriusXM

NEW YORK ( TheStreet) -- When it comes to rosy stock predictions, M&A hype is often the last refuge of a blown call by a Wall Street analyst. Research In Motion ( RIMM), Best Buy ( BBY) and Netflix ( NFLX) are notable examples of stock breakdowns that precipitated M&A hype.

In the case of SiriusXM ( SIRI), one of the market's most compelling battleground stocks, analysts deserve credit for sticking with their fundamental expectations for the company, and in particular, its dance with large minority shareholder Liberty Media ( LMCA). As SiriusXM shares fell below $2 in June, well below the consensus analyst estimate, the satellite radio giant looked like yet another prime example of overoptimistic expectations clouded by M&A hype.

Noting changes in SiriusXM's relationship with Liberty Media and a recovery in its earnings, balance sheet and cash flow, analysts stuck with optimistic calls for Sirius to rise to $2.50 -- beyond $3, in some instances. After SiriusXM reported strong user, earnings and cash flow growth in second quarter earnings on Aug. 7 and Liberty Media subsequently bolstered its stake in the company to 46%, the Wall Street optimism appears vindicated.

On Thursday, SiriusXM touched a new 52-week high of $2.60 intraday, pushing the company to its highest level since the financial crisis.

Three years after Liberty Media caught the market bottom with a 40% stake in SiriusXM, investors and analysts entered 2012 with the prospect that the easy money had been made on the company. But a detailed look at SiriusXM's earnings and takeout prospects still gave many room for optimism about its shares.

Liberty Media gained its SiriusXM stake as a result of a $530 million loan it provided the satellite radio company in 2009. A standstill agreement that prevented Liberty Media from increasing its SiriusXM stake for three years expired in early 2012. In March, a petition with the Federal Communications Commission paved the way for Liberty Media to build its stake in SiriusXM towards control, which it's done in recent stock purchases.

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, and as Liberty builds its stake, those expectations seem justified.

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 FCC petition and a subsequent request by SiriusXM to block some prospective stake increases revived speculation of a takeover by the highly acquisitive Liberty Media, and portrayed two companies at odds over the M&A end game.

Bazinet's expectation for a deal changed slightly as a result of Liberty Media and SiriusXM's FCC petitions. Now he sees a merger and tax-free spinoff as remote because of the hostile relationship between the two companies and, instead, sees Liberty Media bidding for a controlling stake.

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