Sirius XM Holdings Inc (SIRI)

[SeriousMoney]

What Can Sirius Radio Do for an Encore?
WSJ.com, Sirius Satellite Radio Inc. (SIRI: Nasdaq)
By J.P. Morgan ($7.17, Dec. 16, 2005)

WE ARE DOWNGRADING Sirius to Underweight from Neutral, as we see risk to forward earnings estimates, progressively tougher subscriber growth comparisons after a strong 2005 fourth quarter and 2006 first quarter Howard Stern boost, and a challenging valuation disparity to XM.

Santa should be kind to Sirius, as our store checks suggest that Sirius likely gained a retail subscriber share advantage over XM in fourth quarter 2005 due to Howard Stern and should be near parity to XM in overall subscriber additions.

We believe that hoopla surrounding Howard Stern is likely responsible for two thirds of Sirius' retail share gain since second quarter of fiscal 2004. The other third of Sirius' share gain we believe is due to its NFL content exclusive that began in the fall of 2004.

The total cumulative outlook is better than the 1 million subscribers Sirius has said it needed to break even on the deal, but near the total we believe Sirius needed to justify Stern's five year, $500 million paycheck.

However, Sirius should face declining subscriber growth rates in second half of 2006, due to tough Stern comparisons and rising churn on a growing base.

Sirius' efforts to match XM's radio price cuts we believe will take a toll on subscriber acquisition costs (SAC), prompting us to cut fourth quarter operating income before depreciation and amortization (EBITDA) $16 million to a loss of $207 million, while also upping subscriber growth 65,000 to 1.001 million.

Due to a tough share fight with XM, we believe Sirius is likely to miss its stretch goal for free cash flow profits by year end 2006 and full year free cash flow profits by calendar year 2007.

We see 2006 as a transitional year, with the satellite radio story well understood, expense risks rising, and free cash flow not arriving until 2008, while Sirius 5% firm value premium to XM appears high.

-- Barton Crockett, Robert J Milacci, CFA