Citi: Sirius XM Is “Massively Undervalued”

by: Brandon Matthews August 15, 2008 | about stocks: AAPL / SIRI    

Brandon Matthews

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In a research note yesterday morning, Citi states:

Buy SIRI (SIRI) - The stock has been hurt by the difficult macro backdrop and auto production slowdown; however, we believe SIRI is massively undervalued as investors fail to appreciate the size of merger synergies, the opportunity for top line improvement with new plans, and the benefits of greater OEM penetration.

Value is in the Content - Reports of a new internet streaming application that would allow SIRI users to get content on their iPhones and other portable devices are now emerging and highlight that SIRI’s value lies in its content and not its hardware or infrastructure….

A Little Help from Apple (AAPL) - While AAPL is generally perceived as a competitor to satellite radio, the streaming application underscores that it may complement and help satellite radio as the new application would:

  1. eliminate SIRI radio costs;
  2. help generate new subs at a lower cost (albeit with a higher royalty rate given the internet streaming); and
  3. likely improve the ability to purchase tracks from AAPL.

I have said before that Sirius XM stock is undervalued. Now that Citi seems to agree with my reasoning, I look forward to more bullish analyst comments in the coming days. If I can see this so clearly, and Citi sees this so clearly, it stands to reason that the 20 professional analysts covering the stock should be following soon…

Position: Long SIRI.

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This article has 36 comments:

  •  
    Aug 15 06:26 AM
    SiriusXM and Apple partner up to bring the best content in the land to us ladies and gentlemen. "What a wonderful world"
    Reply | Link to Comment
  •  
    Aug 15 06:49 AM
    WITH MEL AT THE HELM, SIRIUS IS GOING PLACES VERY SOON SO YOU BETTER GET ON BOARD NOW BEFORE THE STOCKS PRICE SKYROCKETS. WILL BE A GREAT INVESTMENT. LOVE THAT SIRIUS. T.M.
    Reply | Link to Comment
  •  
    Aug 15 06:59 AM
    With the bright and shining exception of GS everyone seems to think SirusXM is undervalued. What is holding the stock back? The proof of the merger synergies is the key to the stock price. As soon as the layoffs and cost savings can be explained to shareholders and the merger plan executed the stock will move upward. After that, the simple economics of improved cash flow and a clear path to earnings will make this one of a 1.42 stock ever. A lot of pain with this merger, but the payoff becomes tangible in the coming weeks and months.

    Glad that Citi sees the real potential hidden behind the 17 months of FCC melodrama and the tough financing deal to complete the merger. Now we in the 'payoff' stage for SIRI.
    Reply | Link to Comment
  •  
    Aug 15 07:27 AM
    I fully agree this stock it's way undervalued, Institutions have started to take stock positions, this is very good news for SIRIUS XM.
    Reply | Link to Comment
  •  
    Aug 15 07:43 AM
    you can bet all your money, apple will make the jump. it is in its best interest to own SIRI. It will sell the best divice with the best content.
    Reply | Link to Comment
  •  
    Aug 15 07:51 AM
    If Apple would buy out SIRI, what a combination. Apple's leadership could turn this into a blockbuster. Having said that, I see no indication of Apple interest in SIRI.

    Is this just a pie-in-the wish to save your underwater investment?
    Reply | Link to Comment
  •  
    Aug 15 07:55 AM
    apple's not going to make a content play by purchasing a content provider...completely off strategy. there's a reason they didn't build itunes's strength by acquiring movie studios or record companies. they, obviously, didn't need to.

    nope, look for them to partner with solid content providers to deliver a differentiated experience to continue the growth of the ipod juggernaut...SIRI may yet be a part of that, but it won't be on an ipod with a satellite receiver in it...more likely exclusive podcasts, etc as SIRI expands its distribution beyond the satellite infrastructure.
    Reply | Link to Comment
  •  
    Aug 15 08:25 AM
    Are all the the sellers done? If not finish selling. Get out now so this stock can get going. Thank you.
    Reply | Link to Comment
  •  
    Aug 15 08:37 AM
    Since 2004 every analyst "BUY" recommendation has been dead wrong.There have been literally dozens of them and my point is proven by just taking a long look at the 'analyst recommendation' page on SIRI Yahoo.
    When Mel was with Cramer two days ago he chastised Cramer for only talking about Goldman Sachs 'sell' report. Cramer rightly said "Mel, he's the only one who has got it right!"
    Reply | Link to Comment
  •  
    Aug 15 08:39 AM
    So, Burt what is your point?
    Reply | Link to Comment
  •  
    Aug 15 08:56 AM
    Slam: Mr Matthews entire blog is that because Citi has continued very bullish and makes some convincing statements to support its case, the other 20 analysts covering SIRI will fall in line with similar "buy" calls. And this will cause SIRI to go up.

    MY POINT is that the "BUY" analysts have all along been WRONG and everybody who has bought on their sayso over a long four years has less money as a result. Their track record is pitiful!! I think the point is a very simple one!!
    Reply | Link to Comment
  •  
    Aug 15 09:00 AM
    I said this back in May:
    seekingalpha.com/artic...
    Reply | Link to Comment
  •  
    Aug 15 09:03 AM
    I agree with the comments made to this article that the stock will take off soon. I am a small potatoes owner of 1000 shares of now Sirius/XM which I purchased four years ago and watched the market price rise to over $9 a share and was too optomistic about the company then to sell. I wouldn't sell under no conditions. CEO and his team will get the job done and the combined two companies will do well. Good luck to all who hang in there. Keep watching for good news from the company in the near future perhaps as early as year end 2008 or during year 2009.
    Reply | Link to Comment
  •  
    Aug 15 09:03 AM
    However this stock has been fwith so much by shorters, FCC ect-no wonder investers and analysist have been wrong.
    Reply | Link to Comment
  •  
    Aug 15 09:03 AM
    How! Let's go Sirius! Big friday move for us loyal stock holders.
    Like to see $2.00 today. Need the "Wampum"!
    Reply | Link to Comment
  •  
    Aug 15 09:44 AM
    I really don't see Citi's Wible doing much to move this stock. Beyond all of the products and possible services, until the Balance Sheet can be better secured, unfortunately I don't see the stock price doing much. What we didn't know before the merger was the significance of Debt Refinancing, perceived or in reality. Sirius XM's "Convertible Arbitrage" on the night of the merger drew my attention to this fact, like a "Laser". Sirius has 300 million in convertibles due in Feb, 09 with a 4.41 / share. XM's Credit Facility "expires" in May, 09, that's 250 mil and 100 mil that need to be renegotiated for extension or paid.

    All of the partnerships will be great and the additional revenue is more than welcome, but until the company can convince the street that these two items in total are taken care of without further dilution of shares, the stock will not move anywhere fast. When it moves it will move on emotion and the Cramer and Weinkes will beat it back with the outstanding Debt Issues. This is the real battle that needs to be fought to move this stock's price up. Not Apple and Ipods.

    I am long Sirius XM since 2002, I own over 30,000 shares, and 2009 will be the year of Debt Resolution or Not. I will hold on tightly to my shares looking for more than "Window Dressing" around this Debt Issue. As a stockholder I want some answers not White Wash.
    Reply | Link to Comment
  •  
    Aug 15 11:02 AM
    I have held shares of SIRIUS since 2002 and believe this company will eventually be successful. But why did many analist rate the stock a buy when they should have know it was going to be shorted for such a long period of time. Clearly they were wrong. Not just for a couple of months but for years. Analists are a joke. I believe many stocks are manipulated by the big houses. F the FCC. Kevin Martin and the FCC idiots along with congress should be sent to the Russian Front.
    Reply | Link to Comment
  •  
    Aug 15 02:14 PM
    I've had faith in this company since talk of the merge. And if they start talking to Apple, things are only gonna get better. SIRI was hurt because of all the negative press, but with Mel out there talking and more bullish analysts like this, we're gonna see gains. Theres a lot of pessimistic talk for the future of SatRad, but in general investors feel pretty strong about SIRI (predictwallstreet.com/...). I feel the recent dip in sentiment was pretty natural and temporary for this stock, its fluctuates on any given day anyways.
    Reply | Link to Comment
  •  
    Aug 15 02:27 PM
    Once again, cos1000 has cogently stated the single most important issue impacting current share price . . . death-spiral-financing . . . all else is distraction.

    It is hard to imagine that Mel et al would not have conducted proper due diligence as to the available terms and framework for financing an imminent merger approval. A broad, flexible, framework of terms should have been available in advance of the approval and a prospective facility in-place prior to the midnight massacre.

    The NAB stay documents would have been perfected and ready for filing well in advance of any approval and certainly could have easily pre-empted formalization of the merger had NAB so desired.

    Looks all too similar to the guy who buys a house he can't afford, uses exotic financing to close the deal and then sees the market drop 30%. The question is, when the "resets" come, will the common shareholders face foreclosure?

    Reply | Link to Comment
  •  
    Aug 15 02:47 PM
    Recently SIRI had the second largest short position on NASDAQ. At some point all those shorts have to be covered. I'm wating for the big squeeze.
    Reply | Link to Comment
  •  
    Aug 15 04:14 PM
    I have learned never to count Mel Karmazin out.
    Reply | Link to Comment
  •  
    Aug 15 04:31 PM
    I'm with chippy. Sooner or later, the chickens have to come home to roost. How long can you continuously short a stock before it eventually bites you in the ass?
    Reply | Link to Comment
  •  
    Aug 15 04:35 PM
    $1.1bil in debt due in 2009... they paid 16% a few weeks ago for the 5yr bond issue.... Under a buck by Dec... death by debt by 2011...
    Reply | Link to Comment
  •  
    Aug 15 06:12 PM
    Death by debt? The new debt will be shares soon, so your right that the stock will go down if they convertible bonds are converted to shares at 1.87 conversion price. If the stock goes to $3, they eliminate millions of dollars of debt in 1 second. The shares convert, and they sell. Might have to get to $4 before you see massive converting to shares. This will give it enough room to fall so investors can still make out like a bandit, this will also cause shorts to cover in equal proportion to bonds converted to shares.... You see? Its brilliant, and its why they wont talk about it in those terms or discuss details. Why institutions are buying. Why did Cramer say when the price hits $4 the shorts will have to cover? Because thats around the magic number that it now pays to own the stock, versus receive the interest payments. Plus, these bonds are unsecured, where you can sell the stock after you actually create the short squeeze yourself. Max it out around 6-7 with hype, and sell. I would advice people to sell at that point, and hold some for later.
    Reply | Link to Comment
  •  
    Aug 15 06:16 PM
    When the bought the bonds, they equally shorted Sirius. So when they convert them to shares, going to need to be worth it remember, so where not talking $2 here, were talking $4... Why risk holding a bond on a shakey company long term, when you can actually create the short squeeze yourself by simply converting to shares, and covering your shorts at the same time. Its a net zero gain, but just getting rid of those shorts will do wonders for the ability for the stock to go up. Big instiutions wont have to protect their bond customers anymore, and can stop manipulating it, as it is done daily for months.
    Reply | Link to Comment
  •  
    Aug 15 07:39 PM
    Great relmor, but the 1.87 converts your talking about don't convert until 2014. These bonds carry a high carrying cost impacting as Interest Expense and they effect FCF in that regard. By then if the company secures favorable financing and all the winds blow favorably, they will probably refinance these bonds long before anyone has a chance to convert 101% of maturity as stipulated. By the way these bonds are secured by XM Holding and now that the merger has been passed by Sirius XM Radio with collateral shares lent to the institutions selling the bonds at a price of $1.50. That's why we're where we are at with the stock price.

    The Debt I'm talking about needs to be refinanced or paid off in Feb, 09. These are Sirius' 2.5% convertable bonds, with a share convert of $4.41. Now maybe if the stock gets their the bond holders will convert, if not depending on credit markets, they will have to be refinanced.
    In addition there is an additional credit facility that XM has that was initially for $ 200 Mil and then extended an additional $100 Mil under the original terms. This is not a BOND it is a Credit Line that will expire on May 5, 09. This will probably be extended given good revenue growth and merger synergies and the Feb Bond refinance now know. We don't know what the terms will be or for how long. Maybe they pay some down and extend the rest (speculation). So as you can see so far I don't know what your talking about.

    Some have raised concerns about the Sept.,09 8.75% Convertible Bond due, with a share convertible price of $28.5, but this is only for $1.75 Mil and they will just probably pay this off, again if things go as planned. Honda has a $33.2 Mil, 10% Discount convertible, with a share price post merger of $ 0.69 / share to convert. They will probably just convert and take the funds from the share sale.

    The only other debt to shareholder dilution that is concerning it the $400 mil, 10% Senior Convertible, due in Dec. 1,09, with a share convertible post merger price of $10.87 / share. This is significant and again can wind up being dilutive to shareholder equity, or if the winds have really blown right over the next 15 or so months, refinancing these notes will not be an issue.

    Now you can see why, I posted above that 2009 will be the year of Debt Resolution or Not. All the noise above from relmor makes no sense to me, short squeezes, convertible arbitrage, zero sum game. Although I very clearly understand what the terms mean, I don't see how they foretell the future for the company and the real live issues of debt and business plan execution that is in front of them. I want answers to the questions on refinancing this debt, not BS. If revenue generation plans and merger synergies do it, then tell me how and when. Best of Both, possibly at 5.4% of current subscriber participation and additional $48 Mil / Year with, 50% participation an added $ 480 Mil/ year. That one example of what I'm talking about. They need to know their business and its future in a way that can be clearly communicated to the "street". Or else this stock goes nowhere, period. I look forward to reality as presented by management after Labor Day. Mel don't fail me now......
    Reply | Link to Comment
  •  
    Aug 15 07:52 PM
    correction......XM's credit facility expiring May 5, 09 was initially for $250 Mil not $200 Mil as I stated. sorry 'bout that.
    Reply | Link to Comment
  •  
    Aug 16 04:01 PM
    I am a position trader by choice (low stress, less attention required, more time to watch sports (How about that Phelps!)). As a retail level player, last week I bought another 3.6K shares at 1.36 and averaged down a bit in the process to 1.54 overall. The .06 gain to 1.49 yesterday looked good to me. Forward looking analysis and instinct tell me the best bet is commit long. The baby multibillion dollar monster is still in a cave, impeded by expected merged-entity shakeout and surmountable debt. On the debt, yes it is a major challenge--but which side you come down on depends on whether you believe that Mel Karmizen is a mature and resourceful leader. He got the merger done. He is focused on success. He is following his plan. He will handle the debt. As he said and as continuing news coverages shows, the company is doing the right things including making executive and other staffing changes, focusing on merged entity process melding and improvement, and no doubt doing some major league deals under the radar to evoke favorable sentiment when the time is right. By the way, Mel shares a trait with the great Negro League pitcher Satchel Paige, who said, "I use my single windup, my double windup, my triple windup, my hesitation windup, my no windup. I also use my step-n-pitch-it, my submariner, my sidearmer and my bat dodger. Man's got to do what he's got to do."
    Reply | Link to Comment
  •  
    Aug 16 05:09 PM
    cos1000: Thanks for the insight. Good luck with your considerable investment.
    Reply | Link to Comment
  •  
    Aug 16 08:16 PM
    I am glad someone realizes that SIRI has real value As the stock continues to fall or fluctuate at such a low price I will continue to buy more stock. I look forward to its doubling or tripling in the next 6 to 12 months
    Reply | Link to Comment
  •  
    Aug 16 10:22 PM
    Everyone just buy a subscription to SIRIUS!
    Reply | Link to Comment
  •  
    Aug 17 03:53 AM
    Content and hardware. The content they provide is not necessarily exlusive. I am sure you can watch football, baseball etc., on the internet as well as listen to streaming music. New mobile computers (smart phones) provide this ability and will advance further in this direction. Howard Stern? His contract is up in 2010, he may retire, having a lot of money (half a billion?). I listened to Sirius recently and it was cool, but, by no means revolutionary, interner radio would probably be a good substitute as far as the diversity of options. Their TV contraption sounds intriguing, who knows. But again, is this company worth 4 billion, maybe, though it seems their unique value proposition is that it's in cars. Really, though, is the content unique enough to warrant the 12$ a month? 20 million people seem to think so, but the danger is that that may be close to saturation and more and more substitutes (such as streaming mobile options) appear that weren't there when Sirius first came out.

    To my point, they don't have an edge in content. And the hardware maynot be the most cost-effective way to deliver content.

    Good luck, but I am really not sure about this one.

    [ED: Comment edited to remove abuse.]
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  •  
    Aug 17 02:15 PM
    I agree with come on get Sirius. If every speculative stock holder would actually buy and use the product it might actually succeed and be profitable.
    Reply | Link to Comment
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