Sirus XM (SIRI): An Underappreciated Monopoly

Dlugosch continues, "Stock prices for monopolies tend to be fairly constant. In most cases their profits are distributed to shareholders in the form of dividends. Share price rarely fluctuates and return is generated from the dividend.

"What happens if the market has yet to price a company as a monopoly?

"In those cases the investors can get the best of both worlds. They can see share appreciation as the market recognizes a company for being a monopoly and then dividend income as that monopoly distributes profits.

"Previously, Sirius XM Radio bitterly competed against its one and only rival. That competition was a battle that nearly killed both companies.

"After nearly 2 years of justice review the companies were allowed to merge. That merger created a monopoly that has yet to be fully exploited.

"When the companies were finally allowed to merge they did so in the midst of the worst recession in decades. Given that the company was already nearly crippled from frenetic competition poor economic conditions did not help matters.

"And yet the company has indeed survived its near brush with death. Recently SIRI reported improvements in subscriber numbers and positive free cash flow that bodes well for the future.

"Once the company is on solid footing look out. When it flexes its monopolistic power, a power that it has legally obtained, investors will make big money. With shares at $.84 today there are big gains to be had.

"I see SIRI as a $10 stock. Here are several reasons why I would buy shares of this underappreciated monopoly:

"I see no competition on the consumer side. Sirius offers far more compelling choices for listeners terrestrial radio.

"Competition for talent nearly destroyed both Sirus and XM. The bidding wars for prime time content escalated to the point of no-return. Those days are gone and as a result profits will be fatter.

"The most exciting aspect of Sirius and XM becoming one company is that content is now under one roof. That means the new Sirius can charge a premium for the best offerings. Satellite radio will be looking more and more like cable as a result.

"We will have the basic package, but for those that want the best they will be required to pay. So far there is evidence that the premium content is indeed selling. Loyal customers seem to be willing to pay a higher price for that choice. Shareholders will benefit as a result with more dollars flowing to the bottom line.

"At the end of 2009 SIRI increased its subscriber base by nearly 250,000. That brings the total number of subscribers to just under 19 million. That pales in comparison to the number of automobiles in this country.

"There is huge growth potential here and with little competition SIRI can take its sweet time penetrating that very large market.

"For those doubting how far this will go keep in mind the same was said of cable television or cellular phones. Take a look at how many of us have both. The same incredible growth can and will happen with Sirius. If so the value of the company will explode.

"One of the reasons penetration stalled was due entirely to the economy. Paying a monthly subscription at a time of budgetary constraint proved to be a tough nut to crack for SIRI.

"Interestingly subscriber rolls for the company stayed strong through the recession. One could easily imagine SIRI losing customers en masse, but that was not the case.

"Now with the economy on the mend growth should return. More importantly the strong economy bodes well for auto sales that had collapsed. SIRI needs those auto sales to add customers. With that sector improving, growth at SIRI is all but assured."

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