Bear Stearns analyst Rober Peck issued a note today on Sirius’ Q2.
Sirius Satellite Radio
2Q07 Preview: Earnings Likely to Take a Back Seat
• Investment Thesis.
We continue to believe merger overhang has overly weighed on the stock, creating attractive risk / reward levels. Further, we think that conservative fundamentals alone support our recent upgrade; and while we believe the merger closing probability is higher than market sentiment, we think investors can still enter assuming the merger fails.
• Reply Comments Before FCC Due 7/24 Remain Primary Investor Focus. Expect the Companies to Go Beyond Just Rebuttal and Discussion on Competition — XM/Sirius’ Reply Likely Will Contain Concrete Proposals on Public Benefits.
In their response, we believe XM/Sirius will not only rebut the arguments raised by the entities petitioning against the merger, but likely will go beyond just discussing the competition in the audio market. We expect the companies to go into more detail about their proposals regarding a la carte, price guarantees, block and rebate, reduced pricing for basic packages, as well as pricing for the “best of both” drawing regulatory focus towards the tangible consumer benefits that will arise from the merger.
• Leaving 2Q Estimates Unchanged.
We are projecting gross adds of 920k (vs consensus of 930k), net adds at 477k (marginally higher than street at 470k), SAC at $107 (vs consensus of $105), revenues at $225 million (vs consensus of $228 million), and adjusted EBITDA of $(87) million. Sirius reports 2Q results on July 31, conference call at 8AM ET, webcast at www.sirius.com.
• $4 YE 2008 Valuation; Merger Free Call Option.
In our base case, we assume the merger will fail, our projections are lower than consensus, and much lower revenue and FCF than the previous company guidance. Our $4 2008 target is predicated on a DCF that assumes no merger and therefore $0 in merger synergies. Further, our target is supported by a fully taxed FCF multiple, presenting16% annualized potential returns. Hence, we think an approved merger is therefore a free call option for investors.
Position – Long Sirius, Long XM