Smart Money/Dow Jones: Positive On Satellite Radio

Tech File: Satellite Radio Falls To Earth
DOW JONES NEWSWIRES, September 18, 2006 6:04 a.m. (From SMARTMONEY)
By Eric J. Savitz

I wrote about the prospects for the two satellite radio companies, XM and Sirius. I laid out my issues with the stocks in the first sentence: "Based on any normal valuation measure," I wrote, "the share prices for the two players in the satellite radio business appear flat-out ridiculous." A paragraph later, I noted that the stocks had a combined valuation of $17 billion, despite the fact that the two companies were headed for combined full-year revenue of less than $1 billion. Had I stopped there, I would now look like a hero. But nooooooo, as John Belushi used to say. I ignored my instincts and instead outlined the bullish case for both stocks. I asserted that you could overlook their high valuations by focusing on the future, when satellite radio will become commonplace. I said that, "for investors with a speculative bent, the play is to buy a little of both, stash the shares away, watch for the inevitable dips in the stock prices to buy more, and then wait for proof that consumers are frustrated enough with the homogenized mush of commercial broadcast radio to pay for satellite channels." What happened next is that the stocks had one of those "inevitable dips" I mentioned. Well, "dip" is a bit of an understatement: The stocks cratered. Since Aug. 1, 2005, about the time that issue was going to press, Sirius shares have declined more than 41 percent. But that rather ugly performance looks downright stellar compared with XM, which over the same span fell 65 percent. So first, I offer my apologies for screwing up. And second -- I can't believe I am going to do this again -- let me suggest that you consider betting a few bucks on the pair...

...Moffett argues that the stocks do in fact have a lot of the characteristics of a value play. "They are beaten up; sentiment is atrocious; they face a number of near-term headwinds, which creates investor anxiety," he says. "But there's also a big opportunity. Customers love this service." At the same time, he agrees with Cohen that the relative valuation gap is not going to last. "Both stocks have a compelling story to tell," he adds. Having come back around to these stocks one more time, I sure hope he's right.

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9/18/2006 09:51:00 AM

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