Tuesday, May 16, 2006

Barron's Online Catches the Morgan Stanley Upgrades

May 16, 2006

From Barron's "Online Exclusive"

TUESDAY, MAY 16, 2006 1:31 p.m. EDT

XM Satellite Attuned to Better Cash Flow

XM Satellite Radio Holdings (XMSR: Nasdaq)
By Morgan Stanley ($16.96, May 16, 2006)
WE ARE UPGRADING XM to Overweight [from Equal-weight], leaving our estimates broadly unchanged.

We believe that at current price points, XM is trading on the value of its subscriber base projected for 2010. Profitable subscription growth beyond 2010, we believe, is not reflected in the current share price. We base our $31 price target on a bullish long-term view that the industry can reach 25% penetration of registered vehicles ultimately (i.e., our terminal year) and that terrestrial-based networks will remain inferior for robust entertainment delivery to the car.

XM is down 40% year-to-date, and we believe that despite the risk it misses its Ebitda (earnings before interest, taxes, depreciation and amortization) loss guidance in 2006, the potential upside warrants an Overweight rating.

We continue to believe that the satellite radio platform (including optionality from video, telematics, etc.) and the duopoly structure [with Sirius Satellite Radio, also rated Overweight] of the industry should lead to superior long-term growth and returns. We estimate churn would have to grow to 4.5% monthly for cumulative subscriber cash flows to fall below CPGA (cost per gross addition).

We believe that the industry will move from heavily free-cash-flow negative to free-cash-flow positive in 2008 for XM. As these milestones approach, we believe the market's concerns regarding viability of the platform and marginal subscriber economics will abate.

Both companies are well capitalized and fully funded to [reach] free-cash-flow positive. Investors may be waiting for a record-label resolution: The compulsory license with the record labels expires at the end of 2006, and the uncertainty around programming costs may be limiting investor interest in both XM and Sirius. We continue to expect minimal cost increases on a percentage of revenue basis from a new contract.

While we continue to prefer Sirius, we acknowledge that the stocks will or will not work together and that Sirius is capped to some extent if XM continues to underperform.
-- Benjamin Swinburne, CF

5/16/2006 02:32:00 PM

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