Sirius Heads to $2.11: Catches a Lift from Auto Sales & Broker Upgrades

Sirius XM’s (NASDAQ:SIRI) is getting a nice boost Friday after a research brokerage upgraded the stock. This follow after the company disappointed investors with lower than expected subscriber additions during its Q3 2011 earnings announcement. Nevertheless the general sentiment among analysts as well as the state of economy suggests that the company is positioned nicely to build upon its successes so far. Car makers like Ford (NYSE:F) and GM (NYSE:GM) have reported improved sales in October, a trend that might carry on in holiday season as a result of the continued improvement in the U.S. economy.

See our full analysis for Sirius XM

Our price estimate for Sirius XM stands at $2.11, implying a premium of about 25% to the market price.

Car Sales Jump In October, Sirius Will Benefit

Automotive sales in the U.S. showcased a healthy growth of 7.5% in month of October. ^[1] This marked the 2nd highest monthly pace this year despite some sales decline from Japanese car manufacturers due to earthquake problem. Sirius XM’s business largely depends upon its ties with these auto manufacturers, and with penetration rate of between 60% o 70%, improving car sales will have a good effect on subscriber gain for the company.

U.S. Businesses Are Doing Well, Although Europe’s Situation Is Dangerous

Some recent reports have demonstrated that U.S. manufacturing and exports have improved and unemployment has eased.  Although Europe’s economic woes are still a danger to the global economy, silver lining is that improving U.S. metrics can further support vehicle sales in the country benefiting Sirius XM. The Oracle of Omaha, Warren Buffet, even has mentioned that while housing business in the U.S. continues to suffer, most of the other businesses are doing well. ^[2]

Analysts Positive

Our price estimate of $2.11 implies a premium of 25% to the market price. Echoing similar sentiment, analysts from Lazard, BGB Securities and RBC Capital Markets have their price targets for Sirius XM at $2.4 and $2 respectively. There seems to be optimism around growth of free cash flow, and that the current valuation by the market may be too conservative.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. October U.S. Auto Sales Climbed 7.5%, The Wall Street journal, Nov 2 2011 [↩]
2. Buffett: European economic and U.S. home construction will encumbering economy, Taiwan News, Nov 15 2011 [↩]