Friday, May 26, 2006

The Rational Investor: Sirius' Future Looks Bright

May 26, 2006

In an effort to stay informed, Satellite Standard posts articles that may influence the direction of stock price movements:

Sirius' future looks bright
Jamie Dlugosch
The Rational Investor
Friday, May 26, 2006

"The biggest loser in my portfolio thus far has been my selection of Sirius Satellite Radio (SIRI), but the tide may be turning in a big way. Yesterday’s announcement by XM Satellite Radio Holdings (XMSR) of reduced guidance followed by Sirius’ reiterating its own guidance was stunning news in my opinion, and should trigger a much-awaited move by institutional investors away from XM Satellite and into Sirius.

It’s about time. For whatever reason -- anger, fear, or simply poor analysis -- the larger investors have decided that XM was the better play. My good friend at Bank of America has long been a proponent of XM and a basher of Sirius. I wonder what he will say now that XM is expecting 500,000 fewer subscriptions. That’s a big miss in this relatively infant business of satellite radio. Frankly, it was a stunning announcement and should get Mr. B-of-A analyst over to the winning side. I always believed Sirius to be the better play, but I did not expect them to so thoroughly crush XM. And make no mistake, Sirius is thoroughly crushing the competition here.
Consumers have a choice and the winner of late is Sirius by a wide margin. Merger is a must I’m hopeful that the news of the day may spur some much-needed discussions between XM and Sirius. There is absolutely no reason why these two companies should not be merged together into one entity. Sirius could really use XM’s auto deals and XM could really use Sirius’ content. Both could use higher prices that would follow in a merger.

Yes, the regulatory agencies would be skeptical of a combined satellite entity, but they should allow a deal to proceed. The real competition is between satellite and terrestrial, thus there are no monopoly or antitrust issues to worry about.Competition in the space now creates more challenges than benefits. With prohibitive costs to entry, government should support a monopoly as the higher prices charged offset start-up costs. As it stands now, because there are two entities, the price of services is artificially lower than what it should be, on an economic basis.

Oh, sure, one could argue that there is no consumer need for satellite radio and that such a service is a luxury, but is that really the case? I would argue, no. In a world economy, we need to have access to knowledge and information to stay one step ahead of the competition.I could and will make the case that satellite radio serves an educational need in this country. By having more access to content, as compared to terrestrial radio, the listener is improving his life. Even the ability to better unwind from the challenges of any given workday makes satellite a compelling need versus a service.

So management of Sirius and XM, if you are listening, I hope you do us all a favor and start discussing the possibility of a merger. The numbers for one satellite entity would be quite compelling from an investor standpoint.In the mean time, as a Sirius advocate, I will enjoy the fact that my horse is winning the race. I expect Sirius to hit 6.5 million subscribers by the end of they year above what is currently expected. The selling in Sirius has been completely excessive and nonsensical. This horse will be a fine stud in the long term.

I would use this opportunity to buy more shares at these bargain-basement prices. Do so now, before these institutional geniuses figure out the story here. As always, they are a day late. No worries, though, as we should welcome their presence and the higher price it will eventually reap. For those interested keeping up to date on things, may I suggest a subscription to my newsletter service, The Rational Investor. You can join by visiting www.therationalinvestor.com.

Please feel free to e-mail me at jdlugosch@hotmail.com with any questions about my approach. If you are interested in receiving a prospectus for The Rational Investor Fund, please e-mail us a request at info@therationalinvestor.net."

5/26/2006 08:52:00 AM

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