Barclay Capital analyst James Ratcliffe did what so many other investors have done lately when it comes to Sirius XM Radio (Nasdaq: SIRI): He walked away. Ratcliffe discontinued coverage of the satellite radio giant yesterday.
BusinessWeek's "The Tech Beat"."/>
"We believe that the equity price is not being driven by fundamentals or the future of the underlying business, but rather purely by speculation as to the company's ability to refinance or restructure upcoming debt maturities," Ratcliffe explains, as recounted by
BusinessWeek's "The Tech Beat".
In other words, Sirius has become a crapshoot. It's a lottery ticket, hinging almost entirely on CEO Mel Karmazin's ability to refinance the company's debt before the nearly $1 billion that is due this year forces the company into bankruptcy reorganization.
He's right, but doesn't that make this the best time to be covering the company. Sirius may be a stock in casino wrapping, but it simply raises the stakes for those who can have a better handle on Karmazin's ability to keep the satellite radio provider solvent.
At a recent price of $0.11, it's easy to dismiss Sirius. However, it remains one of the most actively traded stocks. As a result of its bloated shares outstanding count since its merger with XM, Sirius commands a market cap of nearly $400 million.
It doesn't end there, though.
If you want to make some easy money with your financially dim buddies, bet them that they can't guess what the price of Sirius would be if the market's perceived value of the company would double.
The correct answer isn't $0.22, based on its $0.11 starting point. It's actually closer to a buck, when you factor in the company's debt load to arrive at an enterprise value of roughly $3.4 billion. If it's enterprise value would double to nearly $7 billion, that's where the stock price -- and market cap -- would have to be.
The leveraged upside doesn't take away from the grim possibility of common stock shareholders being wiped out in bankruptcy. Music -- and digital music in particular -- finds XM competing against cash-blessed companies like Apple (Nasdaq: AAPL) and RealNetworks (Nasdaq: RNWK). Other digital heavies like Amazon.com (Nasdaq: AMZN), Time Warner (NYSE: TWX), Best Buy's (NYSE: BBY) Napster, and CBS (NYSE: CBS) have the means to ramp up spending if this ultimately becomes an arms race.
However, the feast-or-famine mind-set doesn't justify walking away from Sirius as an investment. One less celebrated analyst tracking the company will leave the ultimate lessons in this hit-or-miss case study unheard and unheeded.
Copyright © 2008 Universal Press Syndicate.
Sirius XM Will Be Okay
The internet media loves to destroy this stock. And what's interesting is that the internet headlines are more damaging to the stock than the actual articles! Reading, "Losing Faith in Sirius" is MUCH more damaging than the information in the article. It's a shame.
Sirius XM will be okay - there is money being pumped into the banks for reasons like this restructuring. If Sirius XM doesn't receive a restructured loan, then they have every reason to lash out and start suing people.