Still Too Early to Buy Sirius - Merrill

Merrill Lynch analyst Glen Campbell initiated coverage on Sirius (SIRI) with a sell rating citing that it is too early for investors to step into the equity. The analyst places a $2.30 price target on Sirius, and while he does see merger synergies, he also sees many uncertainties going forward. The lack of any real company guidance can make it difficult for analysts to project performance. This could lead to more conservative stances. While such stances may be frustrating for longs, they will become very beneficial if indeed the merged company can outperform and over deliver. The issue however is that there is little concrete evidence to go on in assuming the merged company can hit the ground running.

REPORT EXCERPTS:

Prospects improved by merger, but a tough road near-term

We are initiating coverage of Sirius with a Sell rating and a fair value estimate of $2.30/share, a 20% discount to our YE2008E per-share DCF value of $2.89 pro forma the pending XM (XMSR) merger. The merger is likely to generate tremendous long-term cost and revenue synergies, in our view, worth $6.5bn in NPV terms. The share price is broadly reasonable in relation to our base case DCF value. However, top line expectations for 2008-09 continue to slide and still look too high. Refinancing the XM balance sheet at the merger closing will be costly, with substantial equity dilution possible. We believe it’s too early to buy the stock.

Post-merger base case looks OK but very uncertain

The long-term market potential for satellite radio is the key to valuation – but is highly uncertain. Our base case DCF valuation of $2.89/share assumes growth from 17mn subs at YE2007 (5.6% of the US population) to 40mn subs (12%) in 10 years; our valuation drops $1/share at 30mn subs and rises $1/share at 50mn subs. Substitutes (notably the iPod) have reduced the addressable market and will continue to do so, we believe. But the merger should help to offset this pressure with expanded content, tiered pricing and a simpler marketing message. So should the continuing growth in the rate of satellite radio pre-installation by car makers. With deep post-merger cost-cuts, EBITDA should turn positive next year, with margins nearing 40% by 2017E.

The near term looks tough

We expect subscriber growth to remain soft in a tough economy. For the two companies, we forecast 2.8mn subscriber additions for 2008 (653K for 1Q08). We believe our estimates are substantially below consensus.

Summary

We are initiating coverage on Sirius Satellite Radio with a Sell rating and a theoretical fair value estimate of $2.30/share. There are no reasonable comparable companies, in our view, so we have used a DCF-based valuation. The pending merger with XM Satellite Radio has received DoJ approval (on 24 March) but is still awaiting FCC approval, expected within weeks and considered very likely. Our base case post-merger YE2008E DCF value is $2.89 per share. We have applied a 20% public market discount to this valuation, which reflects:

1) the high level of uncertainty about the long term market size;

2) our view that near-term expectations for revenues and subscriber growth are still too high; and

3) the challenges of refinancing the XM balance sheet and the possibility of equity dilution.

We note too that FCC transaction approval is believed to be likely, but is not certain. We project substantial (50%+) downside in the share price if the transaction is not approved. We model positive EBITDA starting in 2009 and positive FCF starting in 2011.

Tyler Savery Position - Long Sirius, Long XM

Comments

[Newman98]

I think this guy is being a bit short sighted on subscriber growth. He forecasts 40 mil subscribers by 2018, which is only 2 million a year for the next 10 years. XM/Sirius have been growing their subscriber base by 30% consistantly, and with OEMs increasing their ramp up, I do not see 2 mil subs per year as an issue. Incrase that number to 3 million per year, and you have 50 million subs by 2018, which Campbell states adds another $1 to the valuation. I think that is very obtainable. I think the poor economy right now has a lot of analysts looking very short sighted.

[MergerMonday]

Glen Campbell is a drunken Rhinestone Idiot!
$2.30???? GET REAL!
$6.30 IS MORE LIKE IT!
What is his Real agenda here?
Oh, I know buy really cheap and sell really high!

[pabianchi]

what happens if Howard Stern does not renew his contract. Will it loose subscribers

[pain]

Anal lists are down playing the X factor ladies and gents. The X factor being the unknown potential gold mine and realized power of the combined companies. This will not be known till the deal is done. Although the merger is a necessity for both companies to survive, the potential for success is astronomical when merged with other major companies. At the price of the current shares it is safe to say that companies growing at these rates may not be a fair evaluation. The possibilities are endless and believe you me that there are companies waiting on the side lines waiting for the opportunity to aquire the satrad capabilities. This product has drawn a large amount of clients and is only growing. The future is now and precedents are being set. Why do you think the there is so much opposition? I am upgrading the stock and see a $4.50 to $5.00 near term. All the shorts are gonna get in now too.

[Roxieanne]

pain

This is the first new technology to come along for decades in broadcasting. This is creativity and free enterprize at its best.

Basically the projections by an investor are as good as the projections by the analysts.

This is so transparent-----the dollar has fallen-----the investment houses are in trouble----so there will be more downgrades coming not just for SIRI but for other companies where they have hedged their bets and now have to cover their shorts and naked shorts. jmho

[oregonduck]

2.30 is low as a target price with the merger. When the merger is announced, the price will go up and probably go down a bit post merger, creating another buying opportunity. The fact is that right now is the time to buy because, barring a major finacial crisis with sirius, the price should not plummet. The point is to get your average cost basis in the stock lower. I have bought 10,000 shares this week, bringing my basis down to 2.65. If it goes down to 2.30 pre merger, that is still a good thing for me, given that I am contributing to my Sep IRA this week and will have more cash to make investments. I have enough stock that I have held over a year that I can sell and pay lower taxes on and enough that I have bought in my IRA.

This is good news for those of us who are continuing to buy Sirius pre merger and increase our shares. The calculated risk we play is the small uncertainty of 1. No merger or 2. Limited uptick in price even with the merger or 3. The satellites collide with space junk

[pain]

Rox

This correction is long overdue. It should of happened a long time ago. We have an administration that has been putting a band aid on something that needed to be operated on. The longer it took to correct the more people jumped in and there will be so many that could have been saved before making a mistake. But this won't affect satrad. It is available for everybody. Believe it or not I think that this was the perfect storm that swayed the decision for this merger. The economy is shot and there are enough companies going out of business. Blocking this merger at this point would just be another crushing day on the market. How would it look if one of these companies go bankrupt shortly after? If it was a different time and things were better, they probably would of blocked it. Our government is doing a lot of things for the first time like saving bear sterns. This will be a great time for satrad and this whole ordeal has been a lot of free press. Many people are aware of the product and soon they will be presented with the option to subscribe and they will. We are talking $60.00 to $150.00 a year. That what the headlines should be about!

[MergerTuesday]

I agree with Merger Monday, evrytime one of these anal lysts drop of one of thier comments it's usually to benefit themselves. Sell it short before the downgrade and buy it back on the return trip. I view these a**holes as legal convicts. JMHO

[User 168418]

I HONESTLY HAVE STARTED TO THINK THAT SIRIUS AND SOME ANALYST HAVE SHORTED THE PRICE ON SIRIUS TO HELP FCC MAKE THEIR DECISION. IF THE STOCK IS DOING TO WELL THEN SIRIUS LOSES AN AGRUEMENT WITH THE FCC FOR IT MERGER. SIRIUS NEEDS TO SHOW THAT XM AND SIRIUS NEED TO MERGE. I THINK THIS MONDAY OR NEXT MONDAY FCC WITH APPROVE THE MERGE AND THE STOCK WILL GO UP APP 33% ON THE DAY.

[docbill4u]

This is absolutely ridiculous...this analyst has no idea what will happen with the merger and the new combined synergy is way beyond his little brain to comprehend...hold on to your seats folks...soon it will be blast off time when Mel shares his intentions for this new enterprise...$12.30 sounds more reasonable within a year...

:-)

[turtle_bomb_squad]

Pain,
What does this "administration&q... have to do with it? The market did the damage to itself and then turned to the government with its hand out to fix a problem created by the inner beast. Greed.
Then, when the governement didn't react the way which was expected of, it the market complained that the government wasn't doing enough to fix it. Boo hoo - welcome to the reality of market economics.

Sounds like a case of the baker blaming the bread after he burns it.

[sniper6]

I think the price for SIRI is already ridiculously low.

To all, I advise this- Get in and stay in for the long haul. This stock is going to go UP in capital letters.

Does anyone think some sort of reverse split may be in the cards, to raise the stock price to a level that large institutions would consider investing in it? That sure backfired for Sun Microsystems.

[cos1000]

I welcome Merrill's $ 2.30/ share target price at this time. My appreciation is not for his accuracy but for his timing. Like oregonduck I have added funds to my Sep IRA and am purchasing SIRI and XM long. I also appreciate the "shorts" in this market because they enrich my opportunity to be "Long", by providing a nice pre-merger bottom.

I don't think anyone has a crystal ball on where shares will be going from this level, $2.47 today a.m. I do believe in the short term, we will see, post merger, up days of 5% -10%, with profit or break even day pull backs. Some of the pull back days will be investors taking small profits and a large percentage of weary investors just getting even and out. I think most agree that the trend will be up!

I do believe if you've been long this stock and believe that this technology is the best alternative for your vehicle, whatever that vehicle may be, that you should keep your seat belts on and enjoy the bumpy ride up in stock price.

Just a word about the technology. It is not a good competitor to the ipod or mp3. They represent different choices for portable prerecorded music, not for live radio broadcasts. Why do think Apple is not opposing the merger. Post merger, portable live broadcast products with prerecorded music features, will compete better with current mp3 and Ipod products, not car factory installed radios.

My last thought is, it's now up to the company, Mel and his folks, to deliver a profitable company to us. This will take some time as has already been explained by all the gurus and analysts, 18-30 months, but the signs will need to be there each and every quarter following the merger. They certainly have had enough time to decide on a direction, thanks to regulators, now it's time to show investors the way. If the signs of profitability are there, the stock price goes up. I am sure that Mel is bursting at the seams with information in this regard, and that it killed him to have to present annual results without being able to forecast future performance due to merger decisions being delayed.

Let's go FCC, approve the merger and let us get on with more pressing matters.

[pain]

What's up turtle; My belief is what it is. They allowed lousy lending practices and took their eye off the ball. Sort of like going to Iraq looking for terrorist. People are being destroyed and big brother who is suppose to regulate these things should of intervened a long time ago. They did not allow the first correction to to fully mature. This housing correction will be enormous. The signs are showing up every morning when i tune in to learn more people are not paying the mortgages. Companies are going broke at a record pace. But lets not point any fingers right. With this administration there is never any one liable for anything. Just so you know the last property I bought was in 1991 and i bought my office build in Long Island City queens for $70,000.00 dollars. I have a view of Manhattan. Someone purchased the same size lot and building for $750,000.00 two years ago. That ain't right and as much as i would like it to be true, it's not. This baker did not get burned but a turtle is always SLOW!

[D&S Finacial]

I am not sure why no one is talking about what Sirius is going to do after the merger. They are starting to move into the TV end of the car market with three kids channels currently available for their customers. What happens when they expand out to more channels and then move down the sports channel mode. I dont know the guy who would not love to sit in the back while his better half drives and watch a sports event. Then this stock will really soar.

[cos1000]

D&S, If we're in the back seat we already lost the battle: She got us to go to the Mall with her, or to her Parent's house for the weekend. Just kidding. The possibilities are endless, camping, boating, or on the top of a mountain somewhere. Who Knows....

[joey c]

these analysts are overlooking the growth area of europe , asia , australia and africa....additionally they are overlooking the growth of sirius satellite back seat tv

[163888]

Pain, what are you talking about, the first time, have you forgot about the savings and loan bail out, or Chrysler.

[pain]

Your right, not the first but may be the worst. We shall see as everybody is increasingly over optimistic asking if the bottom is behind us like children in a car asking their parents "are we there yet". Unfortunately there is a long way to go and we aren't even close to half way.

[CapitalWarrior]

Tyler sat on the sideline for years, including the past 13 months the merger has been pending and now appears with an opinion that has virtually no downside. I hope investors will remember his opinions when he is proven to be wrong. He doesn't even venture a guess as to value if synergies and revenue growth outpace his conservative estimate. Thanks for the bold and brilliant in-sights Tyler.

[163888]

Pain, your are right we will see. I for one feel we are way closer to the end of this then the begining. While maybe not totally at the bottum we are close.

Capital Warrior, did you read something different from what I read here? This is the analyst opinion here, not his. The most Tyler did is explain his interpretation of the analysis.

[monk26]

BOOO-YAAA!!! Buy, buy, buy SIRI/XM!!! House of Pleasure is near!Merrill can't stop profits from coming our way, finally. And their ridiculous price targets and "sell" ratings are only geared to confuse you and keep the share price low so they can maximizeTHEIR profits. Throughout this whole ordeal big broker houses manipulated the prices of XM and SIRI shares by spewing their "analyst" ratings, and this is just the latest in a string of lies. Watch them merge and become a solid, healthy, financially vibrant company that delivers great content in a crowded digital infotanement market. And, by that time, all these broker houses will have made their profits in a big way, but WILL YOU??? Stop listening to the "analysts" and listen to your gut. Believe in YOURSELF, not some guy behind a desk who gets paid a big bonus at the end of the year to make money for his company. By the way, on the SAME DAY, another broker house, Miller Tabak & Co., issued a "Buy" rating for SIRI. Now go buy some shares, they are trading at a bargin, thanks to Merrill and the like.

[cos1000]

Monk26... To your point that... "and their ridiculous price targets and "sell" ratings are only geared to confuse you and keep the share price low....". Has anyone here ever used the DCF(Discounted Cash Flow)-based valuation to invest in a stock?

From Investopedia.com, a Forbes company, heres is the formula:

DCF=[CF(1)/(1+r)(1)] + [CF(2)/(1+r)(2)]+...+[... where DCF= Discounted Cash Flow: CF(1) Cash Flow year one: and
r= discount rate (WACC), weighted average cost of capital for the years computing.

So there you have it.....any questions?

[monk26]

Friend, you have awesome knowledge of the DCF, congratulations! My point, however, is that there is more to investing in a company stock than analyst ratings and formulas. In fact, the way these two stocks have traded, especially since the DOJ approval, contradicts any traditional market science. Granted, I may be a bit subjective in my thinking because I own shares in SIRI/XM, but I believe in the product these companies are selling and think that their share price is at a discount right now because of several factors. Forgive my not following the book in my thinking. And, since you asked for questions, how do you justify two directly opposite ratings on the same stock, on the same day, from two different brokerages, from "sell" at Merrell to "buy" on Tabak?

[bosch1974]

I had to chime in with a LMAO after Merrill posted those great earnings today and slashed 3,000 jobs...people are supposed to listen to them because...they obviously don't know what they are doing? Do you think Glen Campbell issued a "sell" on Merrill's shares as well (that's sarcasm folks). Do you think he is one of those 3,000 (that's an actual sirious question).

Disclosure- We are helpless at the hands of hedge funds and the genius of people running places like Merrill Lynch.

[cos1000]

monk.... I too am long both Sirius and XM, since 2002 and a satisfied subscriber with three subscriptions. I was agreeing with you regarding analysts keeping investors confused. I was pointing out the ridiculousness of an analyst who uses a DCF based valuation method because of the vagueness of the variables at this point in this stocks "Life". Sorry that I couldn't better communicate my sarcasm with the use of that ridiculous formula.

[Dauntless]

send a msg to the FCC at [e-mail]

say something snappy like "Get Off Your Dead Ass and make a decision!!"

Thanx!

Send about a dozen a day. Th're slow learners.

Dauntless


On Apr 16 05:19 PM 163888 wrote:

> Pain, your are right we will see. I for one feel we are way closer
> to the end of this then the begining. While maybe not totally at
> the bottum we are close.
>
> Capital Warrior, did you read something different from what I read
> here? This is the analyst opinion here, not his. The most Tyler did
> is explain his interpretation of the analysis.

[163888]

Dauntless, What does your repost of my comments have to do with the price of tea in China? What the hell was your purpose, if you could please clear this up.

[Tyler Savery]

capital warrior....

I have not sat on the sidelines for years. I have been long both Sirius as well as XM for years. The article is about what a Merrill Lych analyst sees, not me. I simply reported what the analyst noted. Please do not confuse my opinion with that of the analyst.

Cheers