Cowen analyst Tom Watts of issued a report on XM Satellite Radio. Excerpts Below:
Negative M&A Tenor Reversing.
Ever since the FCC comment period opened on June 8, sentiment for XM.s merger with SIRI has shifted from negative to positive with more than 3,500 diverse supporters contacting the FCC. We believe the merger stands a 50% or better chance.
High Operating Leverage Should Drive FCF Even w/o a Merger:
Incremental margins for Pre-SAC Cash Flow were 53% for XMSR in 2006. We project mid-70s by 2008, generating exceptional cash flow potential once XMSR turns cash positive, which could be as early as late 2008.
2007 Guidance Low.
We believe both XMSR and SIRI set sub guidance low for FY07, setting the stage for outperformance in H2 as subs ramp from new OEM programs and seasonality.
Losing Market Share to SIRI in Q2. We expect 297K net adds, down from 398K in Q2:06. This compares to 465K net adds in Q2 for SIRI. For FY07, we expect 1.4MM net adds, vs 2.2MM for SIRI. We expect share of net adds to reverse in 2008 as XM.s larger OEM base ramps up installs.
XMSR trades at $545 per 2007E sub and $447 per 2008E sub. These values compare to SIRI.s $677 per 2007E sub, and $539 per 2008E sub . a 24% and 20% difference. Our DCF analysis implies 50+% outperformance relative to the market over the next 12 months.
We maintain our Outperform rating on XMSR even without M&A pot.l with SIRI. We believe XMSR can outperform based on its FCF pot.l alone. Compared to SIRI, we prefer XMSR based on its stronger OEM relationships (60+% market share) and better relative value . 47% of industry enterprise value, vs. 53% for SIRI.
Position - Long sirius, Long XM