Credit Suisse Initiates Satellite radio Coverage
July 24, 2006
Satellite Standard Group keeps you informed.
Credit Suisse today initiated coverage on the satellite radio sector with what is perhaps the most comprehensive report yet this year. The highly detailed and well written report discusses various metrics that investors should become more aware of.
Report Excerpts:
Satellite Radio Coverage Initiation:Satellite Radio Will return To Orbit But It's Too Early To Buy XMWe are initiating coverage of Sirius Satellite Radio (SIRI) at OUTPERFORM and XM Satellite Radio (XMSR) at NEUTRAL with target prices of $6 and $17, respectively.Positive Secular Growth Outlook -We are bullish on the secular growth prospects for satellite radio and the long-term economics of the business model. We estimate satellite radio subscribers and revenue will grow at 32% and 45% CAGRs from 2006-2010, and long term EBITDA margins will reach the 35% level with capex/sales of 2%-3%.
Favorable Risk/Reward -We believe that, intrinsically, there is significant upside to current valuations for both stocks. However, there is a wide range of potential outcomes that yield a wide range of stock prices. We’ve modeled five scenarios for each company and the range of outcomes varies from 25% downside to 155% upside for Sirius, and 25% downside to 230% upside for XM. We probability weighted these scenarios to arrive at our target prices.
An Earnings Momentum Story -Driven by secular growth. Subscriber growth, pricing, churn, and CPGA are the key drivers of earnings estimates. This is not a valuation story given the lack of support from traditional valuation metrics; we suggest caution in calling the bottom for these stocks when more bad news is ahead and vice versa in attempting to call the top.
OUTPERFORM on Sirius-We believe earnings momentum will be positive for the next 12 months. We expect Sirius to beat 2006 guidance and, 2006 and 2007 consensus estimates for subscribers and revenue because we believe Sirius will maintain retail share of gross adds in the 55% range and there is upside in OEM. Our 2006 estimates are 5% above guidance and 3% above consensus for net additions, and 2% above consensus for revenue. Our 2007 estimates are 5% above consensus net additions. We believe Sirius will announce a price increase in the 2007/2008 timeframe, which will drive further positive earnings momentum.
NEUTRAL on XM-We believe that earnings momentum will be negative in the short term. We expect XM to miss its 2006 subscriber guidance of 8.5M; as well as consensus estimates for subscribers and revenue of 8.39M and $935M in 2006, and 11.16M and $1,325M in 2007. Our 2006 estimates are 6% below consensus for net additions and 2% below consensus for revenue. Our 2007 estimates are 3% below consensus for net additions and 7% below consensus for revenue. Over the long term we believe that XM is better positioned than Sirius in the OEM channel and will have greater earnings potential as the OEM channel matures (i.e. 2015-2020). However, we think it will take a longer period of time for XM’s business model to come together and its earnings power to emerge.
Valuation Gap Is Justified -We believe that a valuation premium for Sirius is justified based on an analysis of per subscriber valuations. The terms of XM’s agreement with GM are so onerous that we estimate the GM subscribers have an incremental value (before indirect costs) of only $150, vs $600-$700 for a non-GM OEM subscriber and $900-$1,100 for retail.
Investors who follow this sector can learn more by visiting Credit Suisse
HERE 7/24/2006 07:36:00 PM
SSG Has Merged. You Can Read All Of The Latest SSG Content By Clicking Here
0 Comments:
SSG is not a Financial Advisor. Read Disclosure: HERE
--------------------------------------------------------
