Barclay’s analyst James Ratcliffe has initiated coverage on Sirius XM (NASDAQ:SIRI) with an underweight rating and a price target of $2.00.  While the news may be frustrating to many Sirius XM investors, the research note does offer some balanced viewpoints that the investment community needs to consider.

Ratcliffe notes that he believes that Sirius XM is actually quite healthy, and will not really have an issue in meeting guidance, that there are some aspects of the company where he feels that the market is placing the cart before the horse.  As has become pretty standard, the rating and price target boil down to valuation, and what multiple Sirius XM trades at.  Simply stated Ratcliffe feels that Sirius XM currently trades at too high a multiple.

“We believe the SIRI business is healthy and expect material growth in EBITDA [earnings before interest, taxes, depreciation and amortization] and FCF [free cash flow], but believe, at 14x 2013E EBITDA and nearly 19x 2013E fully-taxed  FCF,  growth is  more  than  priced  in  at  current  levels,” he writes. “For investors seeking exposure to SIRI operational performance, we prefer Liberty Media [the company’s largest holder with a 40% stake] which allows investors to purchase SIRI shares for a more reasonable ~$1.61, even assuming a 20% discount on Liberty’s other assets.”

Setting aside the basis of valuation for a moment, Ratcliffe does bring up a major point that I have spoken of in the past.  If an investor is looking to be invested in satellite radio, should investing through Liberty be the route taken?  Liberty holds approximately 40% of Sirius XM in preferred shares.  Many have pondered Liberty’s strategy and feel that the media company will make a run at getting a majority position in Sirius XM.

“We believe Liberty has ample liquidity for this move and could increase its stake through forward purchase commitments, which wouldn’t require an interim announcement that the stake has increased.  While we don’t expect a repeat of the Liberty/DirecTV transaction, in which Liberty holders got a 6-7% premium, we also don’t expect a material discount.”

Whether SIRI investors like it or not, a position in Liberty media (NASDAQ:LMCA) could be had at a relative discount to trading SIRI.  This also must be factored into the equation.

“Given the size of the addressable market (primarily in-car audio), and the quality of SIRI’s content, we believe that growth on both platforms is entirely compatible,” he writes. “Using streaming media in-car is not without cost; a customer on a tiered wireless data plan using Pandora whenever he’s in the car would generate ~$26/month in usage charges”

Meanwhile, Ratcliffe thinks that Liberty Media this year will split off its 40% stake in the company. “Moving to greater than 50% ownership would require ~$1 billion in share purchases,” he writes. “We believe Liberty has ample liquidity for this move and could increase its stake through forward purchase commitments, which wouldn’t require an interim announcement that the stake has increased.  While we don’t expect a repeat of the Liberty/DirecTV transaction, in which Liberty holders got a 6-7% premium, we also don’t expect a material discount.”

The bottom line is that Ratcliffe is making a valuation call here, and while his model may be conservative, it is his model.  No analyst opinion should be taken as gospel, but rather as a slice of the overall opinion of an equity.  Citigroup has a more aggressive model, and Barclay’s a more conservative one.  Perhaps the truth is somewhere in the middle.  Would splitting the difference and arriving at a $2.50 price target be reasonable?  While very oversimplified, it may be just what investors need to consider.

Barclay’s also discusses the competitive landscape in his research.  In many ways he has a similar opinion to my own.  That there is plenty of space in the sector for several companies to be successful.  In other words, worry about Pandora not a huge issue unless Sirius XM does nothing in reaction to the successes Pandora is having.  That is one reason why I have beat the drum on the Internet side of the business so often.  Sirius XM is not a leader here, and they are not even a fast follower.  They need to bite the bullet and get a compelling Internet product that works.  They then need to market that product in a manner that creates buzz among non-subscribers.

It has been my opinion for quite some time that Sirius XM is currently managing the stock price through trying to get every nickel to the bottom line.  That works great for the short term, but sometimes, in order to keep your product top notch, you need to invest capital into areas like research and development, marketing, and customer service.  Sirius XM perhaps needs a renewed focus on the product side so that consumers feel compelled to join the subscriber rolls.  People can argue and debate about the quality of the business model of Pandora or Spotify, but no one can argue that the services exist, will continue to exist, and are growing with consumers rapidly.  In many ways whether they make money is not material.  They are getting and keeping consumer attention.

While it is interesting that this coverage was announced just ahead of the call, I would not lose sleep over it.  Sirius XM is a widely traded company.  Firms are now stepping up to the plate and beginning coverage.  That is great news.  Some analysts have a learning curve into what drives this company, and with the transparency (or lack of), but in the end, consider that there will be room for that as 2012 passes.

In summary, Ratcliffe is not a jerk, a moron, or stupid.  Such statements are great for cheer leading and getting the sheeple riled up, but in the end accomplish nothing.   Ratcliffe is an analyst that has presented what some may feel is a conservative model.  His multiples are not below average, but his growth prospects are muted when compared to company guidance and other estimates.  Instead of piling on against his opinion, read it, digest it, and compare it.  There is something to learn here that a savvy investor can exploit.

Investing in a company is not about hope, nor is it about rosy glasses.  It is about a marketplace that requires a wide peripheral vision that goes beyond what some investors apply to their investment.