Is Sirius XM’s Latest Pullback Justified?

Sirius XM Radio (NASDAQ:SIRI) stock has experienced a 14% pullback over the first 7 trading sessions this month and is fast approaching our stock price estimate. With no major news coming out of Sirius over the past week, emotional trades seem to be the main reason for the sell-off. Sirius is mainly distributed through automakers and retail locations as well as through Sirius’ own website. Sirius XM has ties with major automobile manufacturers such as Ford (NYSE:F), GM (NYSE:GM) and Toyota (NYSE:TM), which help drive its presence in the U.S. automobile space.

Sirius’ closest competitors include Cumulus Media Inc. (NASDAQ:CMLS) (America’s second largest operator of radio stations) and Westwood One Inc. (NASDAQ:WWON) (the largest provider of audio content in America), as well as traditional AM/FM radio and internet radio offerings from Pandora and Rhapsody.

We currently have a price estimate of $2.00 for Sirius XM Radio’s stock, roughly in line with market price.

Traders Hopeful

While Mel Karmazin, Sirius’s CEO, has indicated that Sirius might put its free cash flow to use by buying-back shares or through cash dividends, most market participants don’t expect this to happen before 2012. Many traders holding long position in the stock are looking forward to Q2 2011 results in August when they hope Mel’s guidance on earnings and on SatRad 2.0, the next generation satellite radio, will take the stock to newer heights. Because emotions seem to be the main driver of recent Sirius stock performance, we expect that the stock price will remain volatile around its fundamental value of $2.00 until management’s next earnings guidance.