Wednesday, May 31, 2006

Bear Stearns Sees XMSR and SIRI Stock Prices De-coupling

May 31, 2006

XMSR XM Satellite: 8K improves visibility, but questions remain --
Briefing.com 31-May-06 08:13 ET

Bear Stearns comments on XM's 8K filing last night where it disclosed a plan to bring all its devices into compliance with FCC regulations on FM modulators. Among the steps XM is taking is to request manufacturers to stop shipping radios and accessories that include FM modulators. Given the average inventory carried by retailers is about 30 days, near term sales are unlikely to be impacted; however, any significant delays could have a material impact on the financials.

While the 8K improves visibility into the issue, the several questions that remain unanswered likely will continue to impact valuations in the near-to-mid term. A "read" of the Audiovox Xpress user manual suggests infringement may be material. The firm believes that management's credibility has been questioned since Q4, when marketing dollars were promised to be curtailed against a strong Howard Stern.

Since then, the momentum has been negative for XM, dissuading growth investors. With a lack of near term valuation metrics for value investors to step in, the firm believes an "investor chasm " has been created in the stock, allowing for more downside. The firm underscores that it does not believe this is an industry phenomenon and in fact believes a de-coupling of Sirius Radio (SIRI) from XM, as XM's previous premium (confidence in management) has been eroded.

5/31/2006 10:58:00 AM

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