Serious problems for Sirius?
Salomon SB favors XM Satellite in satellite radio race
By Susan Lerner, CBS.MarketWatch.com
Last Update: 5:04 PM ET Feb. 6, 2002
NEW YORK (CBS.MW) -- You've heard the hype about satellite radio. Now the first major advance in radio since F-M is finally here.
But XM Satellite hasn't only won the race to bring this technology to the masses; it's also won the favor of Armand Musey over its rival Sirius Satellite Radio.
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"Over the past year, we believe XM has emerged as the leader in the race to provide satellite radio, completing a nationwide rollout in the fourth quarter of 2001 and concluding an agreement with GM for factory installation in 23 of its 2003 models," Musey, the Salomon Smith Barney analyst, said in a note upgrading shares of XM Satellite (XMSR: news, chart) to "outperform" from "neutral."
Although Musey cites the stock's recent pullback as the trigger for the XM Satellite upgrade, it's the company's business model he truly supports.
"We believe that XM Radio's national distribution capabilities should give it the potential to be a widely accepted consumer offering," Musey said. Although widespread availability and rising consumer awareness are anticipated in 2002, he doesn't expect subscriber growth to hit critical mass until after receivers are widely available in automobiles with the introduction from General Motors (GM: news, chart).
Given the XMSR's "nearly flawless execution to date," Musey said he believes the stock represents a pure play on demand for satellite radio.
So if XM is so impressive, why not give it a "buy" recommendation? Despite a $15.50 12-month price target, Musey says he prefers to wait until there is evidence of sales acceleration through original equipment manufacturers. And he acknowledges the possibility of "heavy dilution" that would result from a rumored stock offering.
"We estimate XM will need to seek additional financing before the end of the first quarter of 2003," he said.
Still, the upgrade comes in sharp contrast to Musey's downgrade of Sirius Satellite (SIRI: news, chart) to "neutral" from "outperform" after repeated execution problems resulted in a delay in the commercial launch by over a year and pushed out original equipment manufacturer factory installations until late '03.
"The delay of Sirius OEM rollout to the 2004 model year represents a competitive setback given the importance of this channel," Musey told clients.
And it's not just a competition issue. Musey believes the delay could result in Sirius breaking one of its debt covenants sit it is unlikely the company will generate 200,000 net ads by year-end. This, he said, would likely necessitate the repayment of the company's $150 million Lehman facility. Because he thinks the loan would probably be trading far below par value, this would leave Sirius with only enough funding to operate through the first quarter of 2003.
"We think that Sirius has very little room to maneuver on this matter, and that if execution problems continue the company could have difficulty raising sufficient funds to continue service," he said.
Even though the company has brought in new management to help resolve operational issues, Musey noted that it has still yet to resolve these technology driven issues.
"Sources that we speak with who are closely associated with the receiver manufacturers have indicated to us that Agere's chipset is still not completed in true production form and that Sirius' manufacturing partners are not happy with this situation," Musey told clients. "The current chipset is only a temporary fix."
The stocks reacted as would be expected following Musey's comments: XM Satellite shares popped 97 cents, or 8.4 percent, to $12.56 while Sirius shares fell 33 cents, or 5.3 percent, to $5.95.
But Lehman Brothers was not ready to write-off Sirius.
"We believe Sirius' service launch could be an important catalyst," Lehman analyst William Kidd told clients. "Given that Sirius is on the cusp of having more receiver manufacturers in the market than XM, and that Sirius' receiver partners, Jensen, Kenwood, Panasonic and Clarion, are comfortable enough to have already ordered and built receivers for next week's launch, we are not sure why 'chipsets' are still an issue."
Kidd continues to rate Sirius a "strong buy" with $15 price target.
Susan Lerner is a reporter for CBS.MarketWatch.com.
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