Thursday, May 25, 2006

Satellite Radio - Are XM and Sirius Still Tied at the Hip?

May 25, 2006

For years Sirius and XM have traded in very similar patterns. This is very evident by looking at any long term chart comparing the two. This sector trading behavior has at various times been very helpful to one equity or the other, and at other times been very detrimental.

To date, there has been no real catalyst that has been able to create a separation that would allow for these stocks to trade on a more individual basis rather than as a sector. Hardware has not broken the tie, nor have subscriber numbers.

Satellite Standard Group feels that this sector is perhaps now on the cusp of that tie that has bonded Sirius an XM together being broken. With XM's announcement yesterday regarding lowering of guidance, and Sirius' subsequent announcement reaffirming their recently raised guidance, there seems to be a fervor of activity with these equities. The question is whether this separation activity will continue.

Analyst Robert Peck of Bear Stearns downgraded XM stock to two levels to "Underperform" from "Outperform." A substantial downgrade to say the least. Peck feels that XM Satellite Radios management's credibility is in doubt after cutting its growth forecast Wednesday and failing to follow through on marketing promises. We at SSG stated yesterday that the already tarnished management lost further credibility when they reiterated subscriber guidance of over 9,000,000 only three weeks ago, only to shave 500,000 off yesterday. XM said soft retail sales of satellite radios and problems with product availability pushed it to lower its full-year subscriber forecast. XM's comments were taken by the market as an overall sector issue. Sirius responded by stating that they have seen strong sales. Peck also stated, "We think the market has lost faith, and unfortunately what used to be XM's premium over Sirius (confidence in its management) has eroded." Peck said he's optimistic about the satellite-radio industry long term and that shares of Sirius may begin trading more independently of its rival.

Merrill Lynch analyst Laraine Mancini said Sirius' price drop has been due to bad news for XM, not for Sirius.

After Sirius reaffirmed its growth guidance for this year Wednesday, Mancini maintained a "Buy" rating and $9 price target.

"Investors must separate XM news flow from SIRI fundamentals, which should be easier to do as SIRI continues to meet its milestones while XM works to eliminate overhangs," Mancini wrote in a research note.

On the contrary side, Banc of America analyst Jonathan Jacoby still prefers XM over Sirius. Many people who follow this sector have questioned Jacoby's recommendations in the past. In earlier reports Jacoby has always felt that XM should have a larger market cap than Sirius. It would appear that he does not see the separation that other analysts recognize. He states that he feels that XM will have more valuable subscribers, but we here at SSG disagree with that assertion. Sirius has always maintained a higher ARPU than XM, and even with fewer subscribers is garnering more advertising revenue than XM. Jacoby did lower his target on XM from $30 to $25, and maintained a BUY for XM.

It would appear that most analysts are starting to see a separation. With Sirius maintaining guidance, they are now on track to add more subscribers in 2006 than XM. Further, Sirius is on track to reach Cash Flow Break well ahead of XM with all expenses accounted for. The financial metrics is something you will see many analysts referring to in the coming weeks.

All things considered, both equities may well be very oversold, and near bottoms. It will be interesting to see the trading patterns develop over the coming months.

5/25/2006 11:33:00 AM

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