Sirius Satellite Radio (SIRI-NASDAQ) and XM Satellite Radio (XMSR-NASDAQ) are both up pre-market. Today it doesn’t just look like it is the XM earnings pushing shares. UBS Investment Research has raised its analyst ratings on both companies to a "BUY 2" rating from Neutral in a note by their analyst Lucas Binder.
XMSR: UBS notes improved visibility fo an inflection in subscriber growth during Q3 2007; expects Q3 2007 net adds of 319,000 vs 286,000 Q3 2006; churn rates have stabilized at 2.5% (down from 2.8% in Q4 2006); UBS notes that net adds were weaker than expected, but OEM increases in second half of 2007 will add to net subscribers.
SIRI: Sirius reports on May 1, 2007 and UBS says they believe the business remains with better execution; UBS estimates are for net adds of 485,000 for Q1 2007; UBS thinks they will maintain better market share of growth through 2008 and will benefit through more OEM and factory installs in second half of 2007.
Based on discounted cash flows and 3% growth in perpetuity: increased $13.50 target to $15.00 on XMSR and raised the $3.50 target to $3.70 on SIRI. That is 27% and 25% upside in each, respectively. UBS has been neutral on these since July 2006; noted concerns about the malaise and interference concerns; focus has been on recovery in subscriber growth; visibility for OEM growth has sufficiently improved so they will start to see recovery toward Q3 2007 and could translate to improved subscriber outlook in Q4 2007 and into 2008.
Interestingly enough the research notes that UBS "remains comfortable with liquidity positions of XMSR." That is after ending with $319 million in cash and $400 million in credit facilities; they don’t see sustainable free cash flow until 2009, but they do not expect that XM will have to tap the capital markets.
Further on SIRI, UBS expects that SIRI will generate better cash flows from operations in 2008 than XMSR. UBS notes that it is "way too early" to put an informed percentage on the likelihood of the XMSR-SIRI merger. They have a probablity at 50/50 now, but notes that if the deal does done that both companies would benefit and XMSR enjoying more benefits. Should it fail, UBS thinks both stocks will get hurt. It believes that SIRI is best positioned to execute on its business plan and would consider a price hike that would benefit overall economics and likely increase to its stock price.
XMSR is up 2% pre-market at $12.00 (versus $9.63 yearly lows), and SIRI is trading up 3% pre-market at $3.04 (versus recent lows of $2.72).
Jon C. Ogg
April 27, 2007
Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.
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