We upgrade our recommendation on SIRIUS XM Radio (SIRI) to Outperform based on better business visibility of the company. An improving U.S. auto sector and a rise in consumer spending will sustain SIRIUS XM's near-term growth.
Management maintained its full-year 2011 revenue target while raising its free cash flow estimate. We believe upcoming SIRIUS XM 2.0 product will help the company to increase its subscriber base. Moreover, the company will get pricing flexibility from the fourth quarter of 2011, after the completion of stipulated FCC regulatory period.
We believe improvements in several operational metrics as well as sufficient cash position are the main reasons for SIRIUS XM's valuation premium. We thus upgrade our rating to Outperform with a price target of $2.75, based on 55x our fiscal 2011 earnings estimate.
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