Sirius XM's Stock Is Upgraded by TheStreet
Jake Lynch
05/07/10 - 05:00 AM EDT

BOSTON (TheStreet) -- Sirius XM Radio(SIRI), the barely profitable satellite broadcaster, was upgraded by TheStreet's stock model, which takes a conservative approach to investment analysis

Sirius was upgraded to "hold." The New York-based company boasts a rabid fan and investor base. Though its stock has fallen 13% during the past five trading sessions (8.9% yesterday alone), it has been upgraded by TheStreet because of a fundamental improvement in its business.

Sirius swung to a first-quarter profit of $42 million, or 1 cent a share, from a loss of $50 million, or 7 cents, a year earlier. Revenue expanded 13% to $664 million. The operating margin stretched from 7.1% to 19%, and the cash balance more than doubled to $803 million.

Sirius has been a perennial "sell" at TheStreet because of its precarious finances. Management has repeatedly diluted investors as the company suffered losses. The shares have tumbled 27% a year since 2007. But there was undeniable improvement in the first quarter, namely, the advent of profits.

Sirius has proven that its product has a devoted and growing customer base. During the past three years, it has increased revenue 53%, annually, on average. In the latest quarter, Sirius finished with close to 19 million subscribers, an increase of 1.9% from a year earlier.

Other improvements include a 10% gain in average revenue per subscriber and a drop in the churn rate, a measure of customer turnover, from 2.2% to 2%. Management plans to retire $114 million of outstanding 10% secured notes in June. This is a sign that Sirius is addressing its biggest obstacle: debt.

With a debt-to-equity ratio of 24, Sirius bears an unsustainable debt burden. However, the denominator in that figure is excessively low because of historical losses. If the company is on a path of sustainable profitability, debt isn't as alarming as it appears.

Still, Sirius is expensive. It trades at a price-to-projected-earnings ratio of 75 and a price-to-book ratio of 29, 320% and 815% premiums to industry averages. But its sales multiple of 1.7 and cash-flow multiple of 13 indicate 15% and 10% discounts to industry averages.
Although the model is warming to Sirius, it's unlikely to make it on to the "buy" list in the near future. It merits a growth score of 3 out of 10 and a financial-strength score of 2.9 out of 10, far below the "buy"-list averages of 6 and 7.1. It also receives a weak score for volatility.

The sell-side is a bit more optimistic, with 5, or 56%, rating Sirius "buy" and four ranking it "hold." Janco Partners offers the highest target, expecting the stock to advance 35% to $1.40. Lazard Capital Markets predicts it will rise 31% to $1.35. RBC(RY) rates it "buy," but says it's fairly valued at $1. JPMorgan(JPM) is "neutral" on the stock.

During the fourth quarter, eight of the 15 largest shareholders, including BlackRock(BLK) and State Street(STT), purchased more shares. Five, including quantitative hedge fund Renaissance Technologies, decreased their holdings and two held steady.