SiriusXM Stock Surge May Not End in 2012

NEW YORK ( TheStreet) - After nine months of M&A speculation and quarterly earnings beats colored a near 60% rise in SiriusXM's ( SIRI) stock, analysts running the numbers on the satellite radio giant's earnings outlook expect gains may carry over into 2013.

On Tuesday, Bank of America analyst Jessica Reif Cohen added the company to the bank's list of top stocks, highlighting the company's exposure to a recovering market for new and used cars, in addition to expectations of up to $3 billion in stock repurchases in the next year.

"From a fundamental perspective, SIRI is growing faster than any company in our media universe," writes Cohen in a note to clients. Bank of America gives SiriusXM shares a price target of $4 a share, a more than 40% rise from current levels.

The analyst projects SiriusXM's annual revenue, EBITDA and free cash flow growth will rise steadily in the coming years to reach 47% by 2016, as auto sales grow faster than expected and the company begins to tap the used car market. By 2017, Cohen notes SiriusXM's satellite ratio service may be in 100 million cars, roughly double its present installed base.

Meanwhile, the company may now have the right kind of leverage after debt burdens put it on the brink of bankruptcy in 2009. Specifically, SiriusXM may create earnings leverage for shareholders by financing up to $3 billion in share repurchases, calculates Cohen.

Bank of America isn't the only firm to see new reasons for optimism on SiriusXM's shares, in spite of a big stock rise that puts the company at post crisis highs above $2.80 a share.

Evercore Partners analyst Bryan Kraft upgraded SiriusXM's price target to $3.20 a share from $2.80, citing improved projections on subscriber adds in coming years. Kraft now projects SiriusXM will add between 1.8 million and 1.9 million new subscribers through 2014.

"We continue to believe that a multi-year recovery in auto sales and an expanding total addressable market will fuel subscriber growth in the high-single digit percent range and lead to upside to investors' expectations," wrote Kraft in a Monday note to clients.

Optimism on SiriusXM comes amid a well-publicized dance between the company and its largest shareholder, John Malone-run Liberty Media ( LMCA). Liberty Media is close to taking a controlling stake in SiriusXM, expanding on a large minority investment it made in the company when it was teetering on bankruptcy three years ago.


After Liberty Media built its stake in SiriusXM to 49.5% in September, chief executive Greg Maffei indicated at a Goldman Sachs media conference that it might replace SiriusXM chief executive Mel Karmazin once it takes full control of the company.

Still, in September, Kraft of Evercore Partners noted that the prospect of Liberty taking control of SiriusXM in the near-term is remote - and analysis indicates investors may do better to remain focused on the company's earnings trajectory.

Already, analysts deserve a pat on the back for sticking with their fundamental expectations for the company, and in particular, its relationship with large minority shareholder Liberty Media ( LMCA).

When SiriusXM shares fell below $2 earlier in 2012, analysts highlighted changes in the company's relationship with Liberty Media and a recovery in its earnings, balance sheet and cash flow as reasons to stick with the stock.

After SiriusXM reported strong user, earnings and cash flow growth in its second-quarter results on Aug. 7 and Liberty Media subsequently bolstered its stake in the company to nearly 50% in September, the Wall Street optimism appears vindicated.

On Tuesday, SiriusXM touched a new 52-week high of $2.85 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. New analysis indicates there's still reason to remain optimistic.

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.

Overall, the company has 3.83 billion shares, meaning that its Thursday afternoon share price of $2.85 still gives SiriusXM a near-$11 billion market cap.

SiriusXM's second quarter earnings were highlighted by a 170,000 year-over-year increase in subscriber additions on the heels of a 16% rise in new vehicle sales, as well as used car service reactivations and lower churn, according to Kraft. The company's conversion rate held at 45%.

Prior to SiriusXM's share slump in June and July, David Joyce of Miller Tabak and Martin Pyykkonen of Wedge Partners highlighted conversion rates and used car subscriptions as unheralded catalysts for SiriusXM's earnings, even in the absence of M&A.

Pyykkonen said in an April interview that the used car market may double the company's satellite services 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, as General Motors ( GM) and Ford ( F) show continued U.S. vehicle sales strength.

Meanwhile, analysts also highlight SiriusXM's growing cash flow. 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.

In the second quarter, cash flow generation trends accelerated. Free cash flow grew over 30% in the quarter to $253 million, compared with 2011, adding to year-over-year growth from the first quarter.

Interested in more on Sirius? See TheStreet Ratings' report card for this stock.

Check out our new tech blog, Tech Trends. Follow TheStreet Tech on your wireless devices.

-- Written by Antoine Gara in New York