Shares of satellite radio service provider, Sirius XM Radio, Inc. (Nasdaq: SIRI) were up more than 2 percent from Friday’s closing price, in morning trading on Monday after the company announced that it expects to end the year with 20.1 million subscribers. Sirius ended fiscal 2009 with 18.8 million subscribers.

“I think it’s a combination of more cars being sold, I think they had a pretty conservative outlook generally, I think they’re penetrating the used market better than we thought,” said David Bank, Managing Director of RBC Capital Markets, in a recent CNBC interview.

Miller Tabek analyst David Joyce recently downgraded Sirius XM from BUY to NEUTRAL, citing valuation concerns, but maintained his short-term price target of $1.25 and long-term price target of $1.45. Joyce upgraded Sirius XM to BUY on July 7th in response to the company’s pre-announced Q2 subscriber metrics. Noting that SIRI was now currently trading about 6% away from his short-term $1.25 price target, and that the stock has increased 24% in just the past three months and 98% year-to-date.

“It is not that we just had a revelation that SIRI is more expensive than traditional media companies, but we wish to maintain discipline with our price targets,” Joyce said.
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SIRI is currently trading at about 13.7x Joyce’s 2011E OIBDA (Operating Income Before Depreciation and Amortization) estimate of $752 million, which he still views as an attractive 0.6x PEG (Price/Earnings To Growth) ratio based on his 22% long-term OIBDA CAGR (Compound Annual Growth Rate) estimate, but at 53x 2010 estimated FCF (Free Cash Flow) Joyce sees Sirius XM’s valuation “far above other subscription-model companies in our universe.” Joyce noted that subscription-based cable operators were currently at an average of 5.6x 2011 estimated OIBDA multiple and an average 10.1x 2010 estimated FCF. Joyce also noted that SIRI was trading at about 27x his 2011 estimated operating income estimate of $380 million, which he pointed out was also far above the 10.8x 2011 estimated Operating Income average and the 14.4x 2010 estimated FCF average among other entertainment companies that Miller Tabek follows, which have mixed subscription, advertising, and content business models.

Last Thursday, Standard and Poor’s announced that it was upgrading Sirius XM to a “B” corporate credit rating for the company on CreditWatch with positive implications. Prior to this, its rating was “B.”

“The positive CreditWatch listing reflects the company’s prospects for continued improvement in operating performance and declining debt leverage for the remainder of 2010, which could lead to a rating upgrade,” a press release stated. S&P also mentioned the Howard Stern contract, stating that “the company’s five-year agreement with radio talk show host Howard Stern expires on Dec. 31, 2010. Despite onerous contract costs, Stern has been important to the growth of the service due to his loyal fan base and exclusive content, which is not available on terrestrial radio. We believe that subscriber churn would increase, potentially dramatically, should he decide not to renew his contract.”