Thursday, May 31, 2007

Forbes: Joan Lappin Positive On Sirius

Adviser Soapbox
Sirius Is Sucking A Lot Less
Joan E. Lappin, Gramercy Capital Management 05.31.07, 6:10 PM ET, Forbes

Uncertainty surrounding the deal to merge XM Satellite Radio and Sirius Satellite Radio has put both stocks on the discard pile and pushed them to new lows, but after bottoming on May 16 at $2.66, Sirius has been on a tear. Very funny, you might say, since just about everyone who owns it is underwater, but Sirius is up almost 10% since mid-May, while the Dow has been about flat. We think Sirius is worth a lot more than its present price for those who are patient.
The naysayers have always thought that satellite radio is not a valid business model. I view it more like any utility. Once you launch the satellites, it doesn’t cost much more to service added customers beyond billing and customer care. Unlike the cable industry, in this one you don’t even have to do a "truck roll" and send a technician to install it.
If you can imagine such an absurdity, Goldman Sachs recently, with Sirius at $2.86, put out a 25-page sell recommendation suggesting 20% risk in the stock, or another 50 cents to the downside. Perhaps they are trying to appeal to an audience of short sellers, but aren’t they a little late? The short position in Sirius, usually only about a two-day trading supply, fell to its lowest level in a long time in the most recent May Nasdaq report.
Even as investors don’t find the satellite business model appealing, the car companies definitely do. They have concluded that factory installed satellite radio is an attractive selling point to new buyers, particularly when included in the price of the vehicle. Sirius Satellite Radio has been working hard with some success with Ford Motor to test bundle a three-year package into some models when purchased. Kia (Sirius) and Hyundai (XM) are building satellite radios into 100% of the cars they will manufacture for the 2009 model year, which will begin mid-year 2008. High-end brands such as Mercedes (Sirius) are equipping more than 80% of their production with factory-installed units. Chrysler (Sirius) will be moving from satellite radios in 36% of all cars manufactured in 2006 to 42% of new vehicle production in 2007. Probably due to its other distractions, General Motors has been slow to accelerate the number of XM radios it builds into cars, but now, in its seventh model year, it too will feature them in nearly 44% of vehicles this year.
XM Satellite Radio has stated a goal of adding 1.1 million to 1.3 million net new subscribers in 2007, and Sirius expects to add about 2 million net subs this year. If those numbers turn out to be correct, XM will end this year with 9 million subs and Sirius will approach 8 million for a combined total of 17 million users, compared with 14 million at the end of last year. Once the industry reaches 20 million users, you have a viable base for selling national ads. Consider that there are more than 230 million cars on the road in the U.S. That leaves a lot of cars to penetrate in the future, whether or not the merger is allowed to proceed...read more: here