Wednesday, December 20, 2006
The Un-Fool
December 20, 2006
Today Rick Aristotle Munarriz of The Motley Fool published an article titled “4 Stocks To Sell In 2007”. In the piece he identified XM Satellite radio as a stock to sell. His reasoning is in the excerpt below:
XM Satellite Radio Yes, XM's stock is up 65% since bottoming out this summer -- but why are the fundamentals singing a different tune? The former Motley Fool Rule Breakers recommendation has had to hose down its year-end subscriber targets three times this year, and retail sales are slumping. The few sales taking place at the consumer-electronics superstores seem to be favoring rival Sirius and its sleek Stiletto model, yet even Sirius has talked down the industry's near-term performance.
A lot of the air in XM's shares lately stems from buyout speculation that may never come to fruition. Even if a deal is struck, it may not get regulatory approval. I'm guessing that the Grinch may stick around until attractive add-ons like backseat video materialize in 2008 or 2009.
We here at SSG would like to take a look at this point by point.
Yes, XM's stock is up 65% since bottoming out this summer -- but why are the fundamentals singing a different tune?
The fundamentals may well be swinging to the other direction going forward. XM is on the cusp of CFBE (after capex), and could very well be reporting narrower losses each quarter going forward. This would illustrate stronger fundamentals than Mr. Munarriz is indicating.
The former Motley Fool Rule Breakers recommendation has had to hose down its year-end subscriber targets three times this year, and retail sales are slumping. The few sales taking place at the consumer-electronics superstores seem to be favoring rival Sirius and its sleek Stiletto model, yet even Sirius has talked down the industry's near-term performance.
Yes, XM did have to lower guidance on a few occasions this year. The equity took a big hit as a result. This, coupled with other bad news took its toll on XM throughout the year. The recent subscriber guidance held the line though, which was indicative that the worst has happened. This could well be a case of the bottom being set for this equity. While it is true that Sirius has had an advantage at retail, XM is still selling units.
A lot of the air in XM's shares lately stems from buyout speculation that may never come to fruition. Even if a deal is struck, it may not get regulatory approval.
While there has been a run-up that has in part been fueled by buy-out and merger talk, it is not the sole reason for the price increase. Respected professionals who follow the issue believe pretty strongly that regulators could look favorably on a buy-out or merger, and if it were to come to fruition, the shareholders could see a nice benefit in a short time frame. If it were to not happen, then the narrowing losses, and CFBE should be more than enough to keep the stock price stable, and allow for growth going forward.
Satellite radio has only scratched the surface of potential subscribers, and satisfaction among those that do subscribe is very high. Improved financial metrics and a strong subscriber base are the fuel that will lead to profits.
XM a Sell in 2007? It may well be a buy. Personally I feel that there is a stronger argument for a buy than for a sell at this point. At a bear minimum, it is a hold. To call a sell only 2 weeks prior to the end of the quarter, and 3 weeks prior to CES where there is sure to be news seems foolish in my eyes. 12/20/2006 04:59:00 PM
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