Sirius XM Radio (SIRI) Is Wall Street's Valentine... Again

While Sirius XM Radio (Nasdaq: SIRI) is well known and loved among the masses, on Wall Street the stock has been loathed. Many on Wall Street remember the high-flying, going-to-change the world momentum stock from a decade ago that turned into a pile of rubble. The expression "left a bad taste in my mouth" doesn't do justice for how Wall Street felt about the company.

With its fall from grace, major Wall Street investment banks dropped coverage on the stock and institutional investors abandoned it --- leaving SIRI for the fickle retail crowd.

After years of restructuring, bolstering its balance sheet, and getting the Howard Stern drama behind them, there appears to be a new found love for the stock. Today, this still-developing love affair received an early Valentines Day present...

Morgan Stanley removed their 'Not-Rated' designation and moved to a Overweight rating, the firm's equivalent to a buy rating. Morgan Stanley is only the second tier-one investment bank to bring back coverage on the stock. The other is JPMorgan, which rates shares at Neutral. Of the dozen or so firms that now cover the stock, the view is split right down the middle. 7 brokers recommend investors Buy the stock, while 7 recommend investors Hold the stock.

Morgan Stanley highlighted a number of key issues for the positive rating, but one in particular they cited was a return of institutional investors.

Analyst David Gober said, "We believe that acceleration in free cash flow and the potential for return of capital in '12 or '13 should attract a greater number of institutional investors, driving shares higher over the next 12-18 months."

On valuation, the firm set a 'Street high' price target of $2 per share on the stock. They see a Bull Case of $2.50 and a Bear Case of $1.20. The average price target on the Street is $1.69, with a range $1.50-$2.00.

In addition to institutional participation, Morgan Stanley expects continued subscriber growth acceleration from both new and used cars. This growth, combined with cost containment, should lead to a 15-18% EBITDA growth CAGR through 2015, the firm argues. With growth, cost containment and lower capex, the firm expects $1 billion in free cash flow, or $0.20 per share, by 2015.

The rebound in new car sales will drive upside to near-term estimates of 1.3-1.35 million net subscriber additions for 2011, the firm states. In addition, the used car market provides a huge opportunity, as 67-70 million vehicles should have factory-installed sat radios by 2015, up from 32 million today. Greater subscriber addition from used cars would reduce acquisition costs and improve margins, the firm notes.

Morgan Stanley sees net debt leverage falling to 2x by the end of 2012, down from 3.25x today and 5x at the end of 2009. Commenting on Liberty's 40 percent ownership, the firm said given available capital Sirius could repurchase about 30-35% of its shares by 2015 and maintain 3x leverage.

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