Analyst William Kidd of Wedbush issued earnings preview reports on Sirius (SIRI) and XM (XMSR) Monday. Wedbush sees Sirius as a buy with a $3.50 target and XM as a sell with a $9.00 price target. Obviously these targets are established with the companies as separate entities. If an investor felt that the merger would pass, they might consider buying into XM because the arbitrage is very attractive at this point.
SIRIUS REPORT EXCERPT:
2008 Guidance Likely Encouraging
2008 guidance should garner most of the attention as opposed to earnings when Sirius reports in February.We are expecting Sirius to guide to at least 10 million subs for 2008 vs. our 10.2 million forecast up from 8.3 million subs in 2007. Cash flow guidance should be the other key area, with the question being whether or not Sirius guides to being free cash flow positive for the year. However, even though we are not expecting the company to turn FCF positive until 2009, we still expect marked improvement in 2008. Our projected free cash flow trend has tended to be more conservative than our perception of management’s expectations.
Consequently it would not be inconceivable if the company guides to positive free cash flow in 2008, assuming no merger. All that said, we would be disappointed if the company backed away from stand alone guidance as a result of the merger process.
• Subscriber growth is a non-issue since the results are already known.
Sirius earlier reported 8.3 million subscribers at the end of 2007, in line with our estimated 8.3 million subs. We estimate that 4Q gross additions were 1.15 million vs. 999k 3Q07 and 1.23 million in 4Q06. Given ongoing talk of a weaker consumer and the growing potential for weaker car sales, it might not be readily apparent that Sirius posted its highest gross additions ever in 2007. The subscriber preannouncement also de-emphasizes the importance of EPS, assuming no unusual anomalies, since the subscriber announcement already provides considerable insight into the likely EPS result. In terms of 4Q EPS expectations, we are expecting an EPS loss of $0.12 vs. the consensus loss estimate of $0.13.
• Other than the still pending merger decision, the potential for weaker OEM sales is the biggest issue.
We expect car sales to fall to 15.5 million in 2008 from 16.1 million in 2007. From that, we infer that Sirius’ OEM subs could be impacted by the same percentage change of down 3.7%. As a result, we are lowering our 2008 OEM gross additions to 2.7 million from 2.8 million, bringing our total 2008 gross additions to 4.4 million from 4.5 million. For perspective, we believe this compares to an estimated 4.1 million gross additions in 2007. In terms of net additions, we are lowering our 2008 net additions to 1.9 million from 2.0 million.
• Reiterate BUY and $3.50 price target.
Our $3.50 price target is based on a DCF analysis and does not incorporate any merger premium/benefit, consistent with our view that the transaction has less than a 50% likelihood of approval and thus, will likely be denied within the month. Importantly, if the merger is approved with modest DOJ concessions, we believe Sirius’ post merger trading range could be near $4.50.Assuming a 25%-45% probability on the merger, we conclude Sirius is considerably undervalued at present levels with some merger consideration.
