Janco and Merrill Lynch both came out with reports on Sirius XM Radio (SIRI) Tuesday. From Janco’s perspective, analyst April Horace is downgrading the equity to market perform with her price target under review. Merrill’s Jessica Reif Cohen is maintaining her $1.00 price target with an underperform rating.
Horace noted in her report that she was surprised by Sirius XM’s move to do the $30,000,000 in debt financing prior to the announcement of the third quarter numbers. She noted, “…we were of the understanding that SIRI was going to wait to disclose third quarter results as well as possibly fourth quarter subscriber additions before they actually went to the debt markets. We thought if the results showed progress, it may be a more opportunistic time to raise the debt. We have to admit that SIRI’s recent moves have surprised us, especially before the third quarter earnings release, and not necessarily consistent with previous statements.”
Horace also noted that the possibility of dilution and a reverse stock split Also “Sends Alarms” to shareholders but also believes, “a reverse split makes sense”, however she also concedes that historically, reverse splits have caused overall declines in value.
In closing the report Horace stated, “We believe in the long-term satellite radio sector. We are unfortunately downgrading SIRI to a Market Perform due to the significant uncertainties in the market place and concerns about management’s inconsistent actions. At present we are still reviewing subscriber forecasts, potential dilution, and cost of debt and, therefore, are suspending any price targets.”
Jessica Reif Cohen issued a new note Tuesday dealing with the recent move by Sirius XM in issuing shares. Cohen noted, “every little bit helps” and that the action was “consistent with what we wrote last week (Refer to: “Reverse Split and Dilution on the Table”).
Cohen feels that the debt markets are forcing SIRI’s hand, and that a combination of several factors have “hindered SIRI’s prospects to successfully refinance its 2009 maturities at a reasonable rate without having negative impacts on the long-term FCF profile of the credit.”
Cohen also points out that SIRI’s sales channels are under pressure and therefore she reiterated the equity as Underperform, outlining the following reasons:
1) 2009 debt refinancing risk; and
2) risk of dilution to the equity.
Merrill will also be reassessing their current PO of $1.00 considering SIRI sales channels have come under increased pressure with:
1) MLe forecast for U.S. auto sales lowered to 12.5mn SAR from 14mn SAR (SIRI guidance on 09/09/08 was based on14mn SAR); and
2) deteriorating outlook for U.S. discretionary retail spending.
It would appear that analysts are finding it more difficult to be bullish in the short term on Sirius XM Radio. Should the company post decent third quarter and fourth quarter numbers, the potential will look better, but the debt still needs to be addressed. In current market conditions, it is hard to be positive on the prospects of getting a good debt refinancing deal. However, should the company accomplish such refinancing, a large cloud would be lifted.
Position - Long SIRI