Monday, May 07, 2007

Stifel's Kit Springs Maintains Buy On Sirius

May 7, 2007
Tyler Savery

In a note published today Kit Springs of Stifel Nicholas outlined his thoughts on the situation with Sirius.

Report Excerpt:

- Updated Model and Thoughts: Maintain Buy and $5 Target

- Our updated model is attached - DCF value remains $5: We made several minor changes based on 1Q, but no material changes to our DCF.

Our key assumptions are as follows:

• OEM penetration, which is the #1 variable in our model, goes from 1 out of 3 new cars today to 3 out of 4 by 2012.

• OEM conversion rate trends from 50% in 2007 to 40% by 2012 due to competition from iPods & HD Radio and because lower priced cars are likely to be more price sensitive.

• Gross retail additions decline 5-10% a year because satellite radio becomes factory installed in new cars, the preferred way to receive it.

• Monthly self-pay churn increase 0.05% per year from 1.73% in 2007 to 1.98% in 2008 due to increased competition from iPods, HD, Internet.

• The above drives total subs from 6.6MM currently to 16MM by year-end 2012, or about 1-2MM net additions per year.

• SIRI eventually will raise monthly prices by $2 from $13 to $15, but not until about 2-3 years from now when it has more subscribers.

• Costs/sub come down due to economies of scale and mass production: SAC from $95 in 2007 to $50 by 2012. Exception is royalties and revenues share which rise from 13% to 18% of revenues because of increasing mix of OEM.

• The above yields EBITDA and FCF positive in 2H08 and full year 2009.

• The above yields ~950MM or $0.52 of FCF in 2012 with $0.85 of net cash.

• Conservatively putting a market multiple of 16x FCF/share and discounting back to today at an 9.5% cost of equity yields $5. We also do a more detailed traditional DCF that yields a similar value.

• A successful merger with XMSR could add $1 to our valuation.

Tyler Savery - Long Sirius - Long XM

5/07/2007 09:18:00 PM

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