SiriusXM Drives Straight Race to $3 a Share

NEW YORK ( TheStreet) -- Sometimes just staying the course is a bullish indicator, and a near 3% stock surge by SiriusXM ( SIRI) after the satellite radio giant affirmed its third quarter guidance bodes well for the company as it heads into a 2013 that will bring about big changes.

Already, the company has made impressive gains in 2012, as it grows profits and subscribers far faster than some analysts expected. A surging auto market and an expected in satellite subscriber growth from used car sales bodes well for the company, as its chief executive officer Mel Karmazin prepares to step down from the company at year end. Earnings momentum may also help investors see a change in ownership that will effectively put Liberty Media ( LMCA) in control of the company's board and possibly its day-to-day management.

In third quarter earnings released on Thursday, SiriusXM posted revenue of $867.4 million, slightly beating analyst estimates, while profits came in at $74.5 million, or 1 cent a share. The company retired nearly $1 billion in bonds during the quarter, taking an earnings hit of just over $100 million for the debt reduction.

While the charge caused profit growth to slow from 2011 levels, analysts saw little reason to temper their optimism on the company's outlook and investors cheered the earnings report.

According to Bryan Kraft of Evercore Partners, the company's revenue and earnings before interest, taxes, depreciation and amortization came in better than expected, as per user subscription profit margins rose. A higher than expected turnover in customers, signaled to Kraft that SiriusXM may be favoring its pricing power over subscriber retention rates.

Staying the course may be enough for SiriusXM to drive to new post-crisis highs above $3 in 2013, and Kraft saw no reason to change a recently raised $3.20 price target and 'overweight' rating on the company's shares.

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 current gains may carry over into 2013.

In mid-October, 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," wrote 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.

Also in October, Kraft of Evercore Partners 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 takes 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, SiriusXM CEO Karmazin was seen as on his way out, in a move that was finally announced in late October.

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.

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 $2.90 still gives SiriusXM a market cap of over $11 billion. Wat

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

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-- Written by Antoine Gara in New York

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