Wednesday, February 28, 2007

Stifel On Sirius

February 28, 2007

4Q top and bottom line beat nicely, but churn and SAC metrics missed: See our variance analysis for further detail.

2007 Guidance looks achievable to us: We believe SIRI's subscriber guidance is realistic. Our model gets to 8.07MM subscribers using a 20% decline in gross retail additions and a 36% increase in gross OEM additions, driven largely by the ramp-up at Ford from about 7% of vehicles to 28%. We are lowering 2007E EBITDA from a loss of $288MM to a loss of $347MM to account for merger costs ($40MM) and slightly higher SAC ($97/sub vs prior estimate of $90/sub). Our updated model is attached.

SIRI's self-pay churn trend is substantially better than its overall churn and XMSR's churn. SIRI guided to higher churn in 2007 (2.2-2.4% from 1.8% in 2006). This includes the 45% of subscribers on free trials that do not convert to paying subs. SIRI noted self paying churn was about 1.65% in 4Q06 with no expected change - well below XMSR's self paying churn of 1.8%.

SIRI is a better stand-alone investment than XMSR: This is mainly because we believe XMSR has some merger premium priced into the stock. We continue to derive a $5 target with no merger synergies for SIRI. Our target is based on a 5-year DCF with a WACC of 10.2% and a terminal EV/FCF multiple of 9.1x. The key driver of value is new car penetration, which we forecast will continue to ramp up from 22% of production in 2006 to 65% by decade-end. We continue to see a 55% chance of merger approval, which could add $1 to our target for Sirius shares

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2/28/2007 05:46:00 PM

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