2 Bankers Recommend 2 Flavors of Sirius XM: 3 Things You Ought to Know

By Markets Fool.com

It's been a busy couple of days for investors in Sirius XM Radio , and its Liberty SiriusXM tracking stocks over at majority shareholder Liberty Media.

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Yesterday, Deutsche Bank initiated coverage of one of the trackers with a buy rating and a $37 price target implying about 16% upside from today's $32 share price. This morning, though, rival banker Macquarie applied a less enthusiastic neutral rating to the same tracker, and urged investors to stick with the tried and true, plain vanilla Sirius XM Radio stock instead.

Who's right? Who's wrong?

Here are three things you need to know.


Image source: Sirius XM Radio.

Thing No. 1: This is a tough call

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According to our stats here at Motley Fool CAPS, where we track the performance of both these bankers, both Deutsche and Macquarie are excellent stock-pickers. Each ranks in or near the top 10% of investors we track, although Macquarie slightly edges out Deutsche with a 93% overall rating.

Thing No. 2: Deutsche likes Liberty Sirius' shiny new shares

When comparing Sirius stock to the Sirius tracking stock created by its majority shareholder, Deutsche sees more value in the latter. Quoting from today's StreetInsider.com write-up of Deutsche's rating: "LSXM's 14% ... discount will decrease as a result of Liberty ultimately owning 100% of SIRI through amerger; or at least tax consolidating it through 80%+ ownership."

Put more simply, Deutsche sees investors undervaluing shares of Liberty SiriusXM. This may partly owe to a lack of clarity on when Liberty Media will ultimately mop up the last few shares of Sirius XM that it does not yet own (Liberty currently owns about 64% of Sirius shares outstanding). Investors may also feel uncomfortable owning a tracking stock, rather than Sirius's actual stock.

Thing No. 3: Macquarie prefers tried and true to shiny and new

After all, Macquarie cites the same concern over timing. Although "Liberty's intentions are crystal clear: they remain enthusiastic owners of Sirius XM (now ~64%)," and although "LSXMA tracks the performance of Sirius XM," Macquarie admits to having doubts as to "when and how" Liberty will finally finalize its ownership of all of Sirius. The Australian analyst also worries that Liberty might have to pay a high price -- perhaps much higher than the 5% premium to Sirius' share price that it has bid in the past -- to finalize its takeover.

When you consider that such a premium would increase the value of Sirius XM stock, Macquarie believes an investor is better off just buying "pure-play Sirius XM Radio," sitting tight, and awaiting the eventual buyout. Why waste time chasing tracking stock discounts that might prove illusory, when a profit from owning Sirius is essentially certain?

Final thing: Valuation

And I have to say, that argument makes a lot of sense. As I've already pointed out, from a valuation perspective, Sirius XM stock looks cheap. According to data from S&P Global Market Intelligence, Sirius XM shares sell for only about 17 times trailing free cash flow. Meanwhile, analysts who follow the company predict profits will grow at nearly a 26% annualized rate over the next five years.

That works out to a 0.65 price-to-free-cash-flow-to growth ratio, which makes Sirius XM stock a bargain in my book.

Now, is Liberty SiriusXM a better bargain? It may well be. After all, according to S&P Global data, Liberty SiriusXMstock has an implied market capitalization of just $7 billion, which is less than half of Sirius XM's $19.8 billion market cap, despite supposedly representing ownership of much more than half Sirius XM's stock.

Personally, I suspect that both stocks are good bargains at today's prices. But Sirius XM is the easier stock to understand, and for that reason, I'm more comfortable backing Macquarie's recommendation of Sirius XM stock.

The article 2 Bankers Recommend 2 Flavors of Sirius XM: 3 Things You Ought to Know originally appeared on Fool.com.

Fool contributorRich Smithdoes not own shares of, nor is he short, any company named above. You can find him onMotley Fool CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 309 out of more than 75,000 rated members.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.