Tuesday, January 16, 2007

JP Morgan Upgrades Sirius and XM

January 16, 2007

J.P. Morgan upgraded Sirius Satellite Radio and rival XM Satellite Radio to overweight from neutral.

- The firm cited that the street now better understand competition and retail side of the sector.

- J.P. Morgan also stated that in their opinion, growth rates for the firms have peaked.

- Firm believes that Sirius will have 15,000,000 subscribers by 2010.

- Firm believes XM Satellite Radio will have 14,000,000 subscribers by 2010.

- Firm sees future OEM gearing towards satellite radio as a standard feature.

- Firm stated there is also the possibility that the two companies could attempt a merger in 2007, though regulatory approval would not be certain.

- Conservative assumptions should be beatable. In our new model, we assume long-term 5% declining retail gross adds, after sharper dips near term. We also assume OEM conversion rates slide to 40%, below guidance for rates near XM. Yet even with these cautious and beatable assumptions, we see Sirius with 15m+ subs by 2010, due mainly to automaker deals, enough to interest investors, in our opinion. We see Sirius exiting 2007 with 8.7m subs vs 9.3m previously. Our EBITDA loss estimate narrows to $236m from $303m.
- Merger potential supports shares. We believe Sirius and XM could potentially attempt a merger this year, with regulator approval a toss-up. If approved, we see savings of $344m/yr,worth $1.14 per Sirius share and $5.24 per XM share.
- Scenario analysis valuation support. Sirius has no earnings yet and is trading at a firm value of $6.6b. Valuation support is very sensitive to debatable long-term subscriber estimates. We outline bear, base and bull scenarios, and a probability

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1/16/2007 08:47:00 AM

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