Tune in to Sirius
Posted
Oct 22 2007, 03:02 PM
by
Robert Walberg
Howard Stern couldn't do it. Neither could NASCAR. Not even the announcement of a merger with rival XM Satellite Radio Holdings (XMSR) back in February could make Sirius Satellite Radio (SIRI) an attractive investment. So why on earth has the stock managed to outperform the NASDAQ composite over the past two months by some 22 percentage points?
In a word, timing. Over the next several weeks Sirius should be the beneficiary of several bullish catalysts. First and foremost, shareholders of both XM and Sirius are due to vote on the proposed merger in early November. No doubt the outcome will be positive. What will remain in doubt, however, is whether or not the deal will win government approval. While the experts were originally skeptical of the deal getting done, the growing sentiment on Wall Street is that the DOJ/FCC will end up endorsing the merger before the year is out. For more on this issue, see Congressman Rick Boucher's (D-VA) op-ed piece as posted on the Orbitcast blog.
Sirius is also scheduled to report earnings on October 30th. Even though the street is expecting a quarterly loss of 8 cents per share that compares to a loss of 12 cents per share during the same period last year. Additionally, revenues are projected to jump by 46% year-over-year with net subscriber growth north of 500k. For the year the company expects to have more than 8 million subscribers. Meanwhile the company will inch closer to its goal of being cash flow positive.
Of course the merger, if approved, will be the main catalyst in improving the company's cash flow picture as analysts expect the deal to result in cost savings of between $5 and $7 billion. That sounds like a lot until you realize that combined XM and Sirius have nearly $3 bln in debt. Now you know why this deal is so important to the survival of both entities.
For those that argue that a merger will result in a monopoly, I suggest you revisit the definition of the word. Yes there would be only one major satellite radio company but consumers would still have a ton of music choices be it terrestrial radio, iPods, the Internet, etc. The mere presence of that competition will prevent XM/Sirius from gouging consumers with ever higher subscription prices.
The time has come for the deal to get done, so it is time for investors to tune into Sirius' stock. Despite jumping by nearly 34% over the past couple of months, there's still plenty of room for additional gains. Given the bullish fundamental news and the improving technical tone (back above 200-day moving average), don't be surprised by a near-term run at 5, or 37% above today's closing price of 3.65. You might also want to consider buying XM, as it is trading at a modest discount to Sirius based on the deal structure (4.6 shares of SIRI for every one share of XMSR).
