4 Reasons Sirius Stock Will Stay Down - CS

Credit Suisse analyst Bryan Kraft downgraded Sirius Satellite Radio (SIRI) to Neutral and established a new price target of $3.00 for the equity. The downgrade centers mostly on uncertainty surrounding various aspects of the business.

While those that are long never like to see the term downgrade used, it does represent a reality in what has transpired in SDARS of late. If nothing else, this report should temper some of the speculative enthusiasm that has surrounded the sector on any bit of merger news.

The analysis given in this report is good in that it steps away from assumptions. At this point, many people are making many assumptions. This report boils everything down into what is more real, and more measurable.

Credit Suisse sees more upside than downside.

REPORT EXCERPTS:

Sirius Satellite Radio - DOWNGRADE RATING

■ We estimate, based on our DCF model, that Sirius’ intrinsic value is $3/share pro forma for the merger, implying that the stock is trading roughly at fair value. Our bull case yields a valuation of $3.84 and our bear case yields $2.3, implying a slightly favorable risk/reward long term.

■ We think that in 2009 and 2010, the realization of operating expense synergies and ARPU growth from an increasingly favorable programming tier mix will shift investors’ probability distributions upward, thus providing a positive catalyst for the stock.

■ However, in 2008, the stock price will probably trade in a range from the mid-$2s to $3 because:

(1) Synergies will not be immediately realized and will be offset by integration costs,

(2) The positive ARPU trend is unlikely to materialize this year so soon after the merger closes, and it will be offset slightly by ARPU compression from unactivated cars as Ford (F) ramps up production,

(3) Churn will increase due to continued growth in OEM (although this is not unexpected), and

(4) Weak sales for the auto industry limit gross add potential for this year. In addition, current market conditions are unlikely to favor high multiple, long duration equities like Sirius that trade at high multiples of even ‘10 cash flow.

■ We are lowering our rating to Neutral and our target price to $3.00, from $3.75, due to lower estimates for 2008 and 2009 (lower OEM forecast due to weak auto sales, higher churn, greater music royalty expense). Our pro forma Sirius-XM (XMSR) EBITDA estimate is -$273M for 2008, $35M for 2009, and $324M for 2010. We are lowering our target price on XMSR to $13.80, which is equivalent to the exchange ratio of 4.6x multiplied by our $3.00 target price on SIRI.

Sirius Buzz members can see additional excerpts from this report on the Sirius Buzz Forums.

Tyler Savery Position - Long Sirius, Long XM

Comments

[Yuriko777:]

Sirius and XM appear doomed regardless of any merger approval. I've given up on buying them and moved my money into CVRD, ticker symbol RIO. It was a smart choice.

2008 Apr 08 09:17 AM

[User 163772:]

Today, 4/8/08, TheStreet.com says you should be an aggressive buyer of Sirius stock and that the market is not understanding the upside potential of a combined XMSR-SIRI.

2008 Apr 08 11:26 AM

[User 163772:]

Incidently, good luck Yuriko and so long.

2008 Apr 08 11:30 AM

[kalashnikov:]

Its not what you think but what happens that counts. This stock may go up to $50 someday, it may go bankcrupt. Time is of the essence, everyone's oppinions are self fulfilling prophecies, ultimately who gets it right will be the one partying it up others just merely bitching. Some will think there are geniusis and other fools. I just dont understand why everyone tells others what they think is going to happen, is it that they want others to believe in them or are too scared to be alone on a lonely journey without even that emotional companionship. I will tell you one thing I believe Warren Buffet would never buy this stock atleast as of now, but then I also believe there is going to be a much greater investor than Warren in the near future and I dont know what he would do.

2008 Apr 08 06:28 PM

[cos1000:]

163888, I find myself putting you in the same category of all the analysts that I don't value. You support your use of an irrelevant and untimely Motley Fool article that defends analysts who were on the right side of things, but only after the event had happened. This event is happening now. Then you tell me your not sure what I was getting at with the rest of my comments but if I had read all your earlier comments that you posted that I would know that you agree with what I said. So I'm to understand that you don't know what I meant but that you agree...

Thanks for clearing things up for me. Your so busy telling everyone else what they don't understand about everyone else's analysis, that you lost track of the issue.

Is the above Credit Suisse analyst article relevant or is it a manipulation of the stock price. Is he just telling us what we already know... or is he trying to be stock price predictive in a helpful way. You have to admit his timing is uncanny.

Also, I don't understand how Tyler can say that this analysis is helping keep speculation "Real", by making expectations more measurable. I'm sure Bryan Kraft stayed up all night crunching the numbers presented here. Even after DOJ approval speculation on these stocks was very subdued. A blip up and then a continued downward spiral of stock price supported by negative analysis.

2008 Apr 08 07:00 PM

[Tyler Savery:]

Wow. The comments are hitting from all sides. As an investor I am long on both Sirius and XM. What I like about the Credit Suisse report is that it boils out the assumptions that many have when they are assigning a higher target price. The longer this merger goes on, the more battle fatigued the street is.

People who are in these equities have been sitting in a trading range for quite some time. The selling pressure on Sirius through the $3's and $4's will be strong. Some people (and perhaps many) simply just want to move on.

The shift in street perception was to the merger. Once complete, the swhift will be in how fast these companies can make money.

Credit Suisse put the stock at "neutral" with a $3.00 price target. The analyst also stated that the upside upside potential sits at $3.81 and the downside at $2.31. Given that range, the neutral rating is appropriate. Investors need to decide whether or not they feel that CC approval will deliver the pop that they expect.

For the record, there are aspects of the report that I do not agree with. CS has the synergies at the low end of the range, and I think they should be higher. That being said, I like the fact that this report offers a "calming effect" that brings expectations to a more conservative thought process. I think having a more conservative thought process is prudent at this point. Going forward these companies will be measured more as media companies than tech companies.

Simply my opinion.

2008 Apr 08 08:49 PM

[163888:]

Cos 1000, My point being, it was confusing to me why you would be confrontational with me with most of the rest of your comment, when I clearly said about the same thing earlyer. I am sorry I should have simplified my comment too you more, I didnt reallize I had to do that for you. So here we go: Why are you being confrontational with me on the rest of your comment, when if you read what I wrote before is it similar to what you said. I hope that helps.

Once again, I cant make it any clearer for you. It is a perfect example of how people dont want to look at anything but what they have decided is what something should be. It pertains to this case because Credit Suisse doesn't really go any further then to say dont expect a big jump in share price after FCC approval, and gives his reasons. Then you have most on this Site and others, saying he is flat out wrong and is a criminal (by tring to manipulate the price of a stock), just like what happen in the example I gave before. You would think after their predictions after the DOJ ruled of 5,6, and 7 did not come true after the DOJ approved, they would be more willing to listen but I guess not. Just like as those stocks fell and some analyst were saying sell sell. people called them dumb and trying to manipulate the price so they could get in at a lower level.

I have not lost track of the issue, can you read. I have made it as clear as one can make it in my previous post that it is my position he is most likely correct. It also needed to be stated by him because if you read the prior post, you will see there still are people that think the price will jump big time after the FCC rules in favor of it. That is also why Tyler agrees mostly with this analyst, to give him more creditability. Most who read this here also likely read his blog at Sirius Buzz and know he is vary informed about SIRI and has no real vested intrest in SIRI. So people would be more inclinded to believe this information to be on the up and up and not someone just tying to manipulate the price.

2008 Apr 08 08:53 PM

[163888:]

Tyler, this is jt here. My point was also that you agreed that there most likely, would not be a big jump in the stock after the FCC approval. Unless like you stated in your radio blog cast there was what you called a perfect storm. It was also my main point I was trying to get through to some here. It also it is what I believe the main point of the exert of this analyst report that was put up here.

2008 Apr 08 09:18 PM

[Tyler Savery:]

JT...

It is all relative. A jump to $4 would be quite substantial to some....especially from current prices. The reason I think it will take a "perfect storm" to move this equity beyond the $4's is the number of shareholders that have been sitting on stock for some time. At one point they wanted a profit. The longer this takes, the more they will settle to simply break even. The street is getting tired. Four months ago the only thing that mattered was a merger. Now sentiment is that the merger will pass, and still matters, but added to that is how long will it take until money is made by these companies.

Over the next 6 months.....Bullish into the high $3's ? sure, if the merger happens, and things go well. Bullish into the high $4's (and maintaining it)? At this point no. There simply is not enough information to drive it at this point. That will take good guidance, good metrics, and time.

Again, simply my opinion. Thanks for the comments

2008 Apr 08 09:34 PM

[163888:]

I realize that Tyler, but if you look at most that are posting here, they are pissed at this analyst because he feels in the near term the stock will only go to about 4 and not as high as they think it will. He was not bearish on it for the long term 1 and 2 years out. So that can only be the reason for so many people to be riditculing him. On top of that out of the 13 analyst I have followed none have said that any major synergies will take place for at least a year, so most should already know that part of it, and should not be a reason for the remarks people have made towards him. I am a beliver that when or if it does take off it will be a long and sustainable rally like with DISH back in 1999, most likely after they clear up the merger mess and reach critical mass (My opinion in 2 just ove years time).

2008 Apr 08 10:36 PM

[163888:]

correction: in just over 2 years time

2008 Apr 08 10:38 PM

[gekko13:]

Why the hell are you people even bothering to lose sleep over this? The FCC will approve on the week of April 21. There will be an immediate short term pop into the high 15's for XM. You people should not even be concerned with SIRI here. Due to the arbitrage spread that is currently built in, you all should be dumping SIRI and transfering that money over to XM. You will at least get some of your losses back immediately even if XM doesn't pop after the merger (highly unlikely). After that POP there of course will be immediate profit taking just like the last time. So the choice is this: Take the profit then and hope that both stocks go down before the conversion? Or wait until after the conversion and then decide to sell your higher quantity of SIRI shares at a higher price?

I'll tell you this: I am holding on to all of my SIRI for three reasons:
1- Both these companies were bleeding hundreds of millions for YEARS and were trading at MUCH LOFTIER levels despite that fact, because of the cash-making potential their product offers. Now they will be ONE, and the IMMEDIATE monthly revenue will be 17+million subscribers X oh, let's just say $9.99 (for shits and giggles). All this with greatly reduced marketing expenses.

2- Terrestial radio SUCKS. I don't have anything to listen to in my old beat-up car except terrestial radio. And 75% of the time, I have it turned off. BECAUSE IT SUCKS. Commercials and crappy musical rotation. Mark my words in a couple of years, the radio as we knew it will be like the T-Rex. I can't believe people still listen to it. I would be shorting the hell out of all the radio stocks if i had more money.

3. I don't think the Ipods (and the like) will be much of a competition. Think of them just as the modern day CD player in your car. I think people will use them as a SUPPLEMENT to the satellite radio. Remember: you can't download a live talk show, football or baseball game, weather report, etc. to your mp3 or burn it to a cd, at least not while you're driving! And if you could do it, why the hell would you want to?

The bottom line? SIRI will be a MONSTER, and SOON. I'm not an analyst or an insider, and it's SOOO obvious to me? Now, don't you think all those geniuses know this too? If they don't, then I should have THEIR jobs! The stock will soar on POTENTIAL first, then the money will start ROLLING in. One other note...can you folks say "short squeeze"?

Tyler, any feedback?

J.C.

P.S. I think in a couple of years, due to the market dominance of SIRI, the FCC will eventually grant a license to another company (Clear Channel?) so they can compete with SIRI, because SIRI will be a monster.

2008 Apr 09 04:26 AM

[jbs57:]

This down grade is dumb...I work at Ford Dearborn Truck installing Siris Sat. Reciever units on the top of the trucks about 3 out of 4 have them at 62 trucks per hour off the end of the line figure out the new units that will be sold this year the plant has 3 shifts for added production, this is the time to buy more SIRI at discounted prices the cheeper the better

2008 Apr 09 10:53 AM

[jbs57:]

the down grade is stupid...I work for Ford Truck installing Siris Sat. reciever units on on the top of the trucks at a rate of about 3 out of 4 that times 62 trucks per hour with 3 shifts now figure out how many units will be sold this year...now is a good time to buy these are bargin prices for the long term.

2008 Apr 09 11:03 AM

[Sirius Fan:]

Does anyone remember the arguments when cable TV was a new idea? "Pay for TV?? Why would anyone pay for TV when you can get it for free?" 20+ years later, we all know the answer to that question: more choices, more selection. Now, when we move to a new residence, one of the top items on the 'to do' list is to make sure our cable is connected right after the electricity is turned on.

JC hit the nail on the head with point #2...Terrestrial Radio SUCKS. "Build a better mouse trap and the world will beat a path to your door." That's what Satellite Radio is, and those of us who subscribe already know that. True, watching the stock price on a daily basis can certainly cause ulcers, but isn't the whole point of going "Long" on a stock mean looking toward the long-term? Yes, I watch the price daily as well, but I do so for the purpose of BUYING IT AT A BARGAIN!

The service isn't going anywhere. The merger will be approved. Mel Karmazin is not the type of CEO who will run this ship aground. The combined companies will become profitable. Long term, this ship will sail, and sail true. If storms scare you, then go hide in the galley or abandon ship, but don't be insulted when the rest of us don't send a post card!

2008 Apr 09 11:45 AM

[163888:]

gekko13, I agree ipods do not compete with satellite radio anymore then cd players did with regular radio. Content is and will always be king.

Sirius Fan, I totally agree Mel is a genius in the radio industry. To bet against him, would be like betting against the U.S. economy, you will lose every time. If you were to ask any intelligent shareholder in the radio industry who would you want at as captain of the company they would say Mel every time. You can also bet he looked vary carfully at SIRI company dynamics before he came over to them. The last thing he wants is to go out with a loser, so he must have seen major promise in it.

2008 Apr 09 02:51 PM

[RON-NNJ:]

First time on this blog.. so here goes.... (1) how much will be reduced in capitalization savings as all staff, attorneys, high level exec's, etc are removed?...(2) How much is spent in rival merchandising, in media over lap that will no longer be necessary, all that advertising is halved? ...(3) How many car companies can now jump on board with just saying "satellite radio also sir" no having to say well we only offer this brand or this brand...(4) ... Never mind that there will now be one game in town so Howard deservingly so got alot of bucks but that was it folks there will be one company to contract compete with... no saying hey i'll go to XM if you dont pay me... all that talent money in contracts will be less in coming negotiations..(5) Its coming folks. no stopping it.. the same people who said what is this Home Box Office with crazy looking antenna's on the roof... lol..... HBO folks Oh and by the way Directv uses XM solely now all directv subscribers will get to here and see a who new audience that will see the product for free...I don't know maybe its just me but not many companies worth this much being dumped.. ok go ahead and dump i'm buying your shares, lets see whos right in 2weeks, 2 months 6 months or a year... 28,100 shares Long at .77
Ron

2008 Apr 09 06:37 PM

[RON-NNJ:]

Have never posted then two in an hour here is yahoo finance page short sell info, wait until the pop and all these shares need to be bought back 6.8% of the entire float is shorted!!!

NEW YORK, April 9 (Reuters) - Short interest on the Nasdaq fell 1.2
percent in late March, the exchange said on Wednesday, suggesting a slight
decrease in bearish sentiment in the stock market. For story please see
[ID:nN09293703].

Below are the five Nasdaq stocks that experienced the largest increases and
decreases in their short positions from mid-March to late March, according to
information released by the exchange.

The five companies with the largest overall short positions are also
listed.

The latest data is as of March 31, while the previous period's data is as
of March 14.
Company March 31 March 14 Net Change Pct Change
----------------------...
FIVE BIGGEST INCREASES:
Sirius Satellite (SIRI.O: Quote, Profile, Research) 137,781,424 97,375,012 40,406,412 41.5
Level 3 Comm (LVLT.O: Quote, Profile, Research) 243,930,977 223,577,359 20,353,618 9.1
JetBlue Airways (JBLU.O: Quote, Profile, Research) 44,094,440 37,016,900 7,077,540 19.1
EMCORE Corp (EMKR.O: Quote, Profile, Research) 15,138,089 8,084,855 7,053,234 87.2
Focus Media (FMCN.O: Quote, Profile, Research) 15,908,747 9,432,201 6,476,546 68.7
FIVE BIGGEST DECREASES:
E*TRADE Financial (ETFC.O: Quote, Profile, Research) 90,336,136 104,396,736 -14,060,600 -13.5
Intel Corp (INTC.O: Quote, Profile, Research) 63,195,376 75,796,996 -12,601,620 -16.6
Tellabs Inc (TLAB.O: Quote, Profile, Research) 20,025,891 29,089,610 -9,063,719 -31.2
Yahoo Inc (YHOO.O: Quote, Profile, Research) 41,280,401 49,814,479 -8,534,078 -17.1
Marvell (MRVL.O: Quote, Profile, Research) 24,505,945 31,656,996 -7,151,051 -22.6
FIVE BIGGEST POSITIONS:
Level 3 Comm (LVLT.O: Quote, Profile, Research) 243,930,977 223,577,359 20,353,618 9.1
Sirius Satellite (SIRI.O: Quote, Profile, Research) 137,781,424 97,375,012 40,406,412 41.5
Microsoft Corp (MSFT.O: Quote, Profile, Research) 118,383,897 123,090,091 -4,706,194 -3.8
E*TRADE Financial (ETFC.O: Quote, Profile, Research) 90,336,136 104,396,736 -14,060,600 -13.5
Charter Comm (CHTR.O: Quote, Profile, Research) 87,678,485 90,953,371 -3,274,886 -3.6
Source: Nasdaq data as of March 31, Reuters Estimates
(Reporting by Emily Chasan; Editing by Andre Grenon)

2008 Apr 09 06:50 PM

[pain:]

This is absolutely shameful.
This is so wierd how this stock hit such a low!
Lets be realistic.
This is a big deal if these two companies combine.
There will be no remorse and Mel will not hold back.
This man is living for this.
This is keeping him alive.
This is only getting more and more sirius.
All the shorts are gonna get shorter.
The DOJ set the tone and the FCC will follow suit!
There is no hiding how sick satrad is.
This is going to be a grand slam!

2008 Apr 09 07:15 PM

[muley101:]

One overlooked synergy from the merger will be much better leverage over suppliers to lower operating costs. This will be huge in making the combined company profitable quickly. Also, there is a built up demand for new (confused) subscribers that will break loose after the FCC announcement. If BellSouth and AT&T can merge back together, nothing should stop this merger. This stock is going to $12 within a year.

2008 Apr 22 11:01 PM