Wednesday, April 18, 2007

Cowen Issues Q1 Preview Note

April 18, 2007

Cowen's Tom Watts issued a 1Q preview note today:

Sirius Satellite Radio

Reporting Date May 1, 2007

Key Issues

- M&A Tenor Growing Negative. Since announcing a merger with XMSR on Feb 19, sentiment has grown noticeably negative for approval, unnecessarily pressuring both stocks.

- High Operating Leverage Should Drive FCF Even w/o a Merger: Incremental margins for Pre-SAC Cash Flow were 42% for SIRI in 2006. We project increasing margins of 47% in 2008, and approaching mid-60s through 2012.

We expect significant cash flow potential once SIRI turns cash positive in Q4:07, ahead of XMSR.

- 2007 Guidance Low. We believe both XMSR and SIRI set sub guidance low for FY07, setting the stage for outperformance in H2 as subs ramp from new OEM programs and seasonality.

- Gaining Market Share. We expect 526K Q1 net adds, down from 761K in Q1:06. This (31%) Y/Y reduction compares to (38%) for XMSR and represents cont.d market share gains vs. XMSR.s 355K. For FY07, we expect 2.1MM net adds vs. 1.5MM for XMSR. We expect market share to reverse in 2008 as XM.s larger OEM base ramps up installs.

Valuation SIRI trades at $657 per 2007E sub and $527 per 2008E sub..

These values compare to XMSR.s $535 per 2007E sub, and $437 per 2008E sub . a 23% and 20% difference. Our DCF analysis implies 79% outperformance relative to the market over the next 12 months.

Recommendation

We maintain our Outperform rating on SIRI even without M&A potential with XMSR. We believe SIRI can outperform based on its FCF potential alone. Compared to XMSR, we prefer XMSR based on its stronger OEM relationships (60+% market share) and better relative value . 48% of industry enterprise value, vs. 52% for SIRI

Labels: cowen, merger, q1 2007, sirius, xm