Should You Invest in Sirius XM Radio Inc. (NASDAQ:SIRI)? Q1 Update

Last time (December 20,2010), when I had posted a similar titled article, SIRI was trading in the range of $1.37 to $1.4. I mentioned in that article that ‘if the company beats its forecast, then it is worth considering investing in SIRI.' The company's reported EPS did indeed exceed analysts' consensus for Q4-2010, albeit by a similar margin as was for the third quarter of 2010. Since the time I posted my earlier article, the share price of SIRI has edged with the yesterday's range of $1.68 and $1.73, comparing very favorably to the 52 week range of $0.82 and $1.88. Has there been any change in the stock's growth story or valuation?

SIRI ended 2010 with 20,190,964 subscribers beating its own estimate of 20.1 million announced during the third quarter results announcement. In January 2011, XM Satellite Radio Inc., SIRI's wholly-owned subsidiary, merged with and into Sirius XM Radio Inc. 

Subscription rates likely to go up however….

The company had agreed not to raise the retail price for, or reduce the number of channels in, its basic $12.95 per month subscription package, its a la carte programming packages or certain other programming packages until July 28, 2011. Under the FCC's order approving the Merger, SIRI may pass through cost increases incurred since the filing of its FCC merger application as a result of statutorily or contractually required payments to the music, recording and publishing industries for the performance of musical works and sound recordings or for device recording fees. However, revenue expansion due to subscription rate increases could be offset by increase in royalty payments to BMI, ASCAP and SESAC. Increase in royalty payments may not have much impact on 2011 financial performance as the company agreements with ASCAP and SESAC through December 2011.

Damage to financial integrity 

Recently, SIRI jock Howard Stern filed suit for unpaid performance-based stock awards under prior 5-yr. contract, surprisingly soon after multi-year contract extension that seemed to address an overhang. The suit claims that Stern helped Sirius exceed its subscriber targets by at least 2 million subscribers in each year of the contract, triggering a new stock award each time. It also said Stern put Sirius in a position to complete its 2008 acquisition of XM Satellite Radio Inc., which had also courted Stern years earlier. Though I see lingering headline risk on this news, I believe the parties amenable to potential settlement.

Financial position improving

As of December 31, 2010, SIRI had an aggregate principal amount of approximately $3.3 billion of indebtedness, while the net current assets amounted to $-1,357.9 million. So, the company's financial position is still weak. However, the company recently commenced a tender offer to purchase for cash any and all of its 3 1/4% Convertible Notes due 2011. The purchase price offered for each $1,000 principal amount of Notes validly tendered and purchased pursuant to the tender offer is $1,007.50. The tender offer will expire at 12:00 midnight New York City time, on April 20, 2011 (such time and date, as it may be extended, the "Expiration Time"). The tender offer is an important signal regarding the company's improving financial position. Moreover, SIRI's Debt/Equity has favorably declined from 330.42% to 14.55% in the last three years – this indicates that the worst days of debt crisis are behind.

Share price development attractive….but is lacking support from institutional players and insiders

The following table sets forth the high and low sales price for SIRI's common stock, as reported by Nasdaq, for the periods indicated below:

SIRI's current stock price ($1.72) is within 15% of the 52-week high ($1.88), a positive sign. The company's relative strength trend has been increasing over the last 4 months. This type of price action is favorable. Currently, analysts' one year target price ranges from a low of $1.25 to a high of $2.4, compared to a consensus of $1.9. I think in the next few weeks the share price could beat analysts' consensus estimate of $1.9 but it is difficult to believe that it will cross $2 as it is not getting enough support from institutional players and insiders.