Sirius XM Radio: Risky or Rewarding?
Audit Integrity caused quite a stir among Research Recap readers a week ago with its ranking of Sirius XM Radio (SIRI) as the most risky media and entertainment company, based on its corporate governance practices. Now the company has received a number of upgrades by analysts in the last few days. So who’s right?
Audit Integrity’s forensic analysis of accounting and corporate governance practices distinguishes between the companies of greatest and least risk using its Accounting and Governance Risk (AGR®)) ratings. Companies in the bottom-ranked Very Aggressive AGR category “have had consistently opaque financial reporting, weak corporate governance, and as a group are expected to have inferior performance relative to their peers over the next three months on a total return basis.”
Even though Audit Integrity assigned Sirius XM a “Very Aggressive” rating, the company’s 12-month total return was over 400%, which Audit Integrity explained as “simply a function of the market responding to the pendulum having swung too far in the downward direction in 2008.”
The company’s share price has rallied sharply in the last few days to over $0.90 after Lazard Capital and Wunderlich Securities analyst Matthew Harrigan both picked up coverage of the stock with a Buy rating and $1 target.
Last week Standard & Poor’s upgraded Sirius XM’s debt rating to B with a positive outlook, and yesterday Moody’s followed with a Caa1 rating and a Stable outlook. Then Moody’s upgraded Sirius XM’s debt rating slightly. As 24/7 Wall Street’s John C. Ogg notes, “As with all ratings of this sort, the ratings are still well into junk territory and come with the concerns despite the raised ratings. Moody’s noted that leverage remains very high at about9.7-times incorporating standard adjustments. This is based upon long-term capital reinvestment needs of the company/sector, but the improved liquidity offers additional flexibility to execute its growth plan and potentially reduce leverage. Moody’s noted that despite a $100 million cash flow announcement, SIRIUS XM would have ‘been a user of cash absent a significant working capital inflow during the year.’”
JP Morgan had a Neutral rating on SIRI in a Jan 19 report and saw “limited room for upside” from the price then of $0.67. the same day RBC Capital Markets had the company at Sector Perform with Speculative Risk. Barrington Reasearch on Dec 29 lowered its target for SIRI to $1.10 from $1.25 but maintained its market Outperform rating.
Satwaves believes “shares of Sirius XM are poised for yet another explosive upside move, based on recently reported call option activity,” and has a target of $1.25.
One factor in Sirius XM’s favor: if potential car buyers deterred by Toyota’s quality problems opt for Chrysler, Ford, GM or Honda vehicles, the company could benefit from factory activation agreements with those automakers. XM radio is a factory-installed option in only a handful of Toyota models. Ford’s just announced 24% increase in sales in January won’t hurt.
So is Sirius XM radio risky or rewarding? The answer is that these two attributes are not mutually exclusive. Audit Integrity’s rating is just one piece of information investors should consider. As history has shown, corporate governance is important. And certainly the company’s debt load, dependence on the automobile market and threats from emerging competitors such as Pandora are significant risks. But those risks should be already reflected in the company’s stock price, meaning there may be potential upside for risk-tolerant investors.
See Alacra Pulse for latest analyst comment on Sirius XM.
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