Cowen issued a report on Sirius today. Yet another analyst seeing increased odds in merger approval. 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 42% for SIRI in 2006. We project increasing margins of 47% in 2008, and approaching mid-60s through 2012. We expect significant cash flow potential once SIRI turns cash positive in 2008, likely ahead of XMSR.
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.
Gaining Market Share. We expect 465K Q2 net adds, down from 600K in Q2:06. This compares to XMSR.s 297K net adds in Q2:07. For FY07, we expect 2.2MM net adds vs. 1.4MM for XMSR. We expect market share to reverse in 2008 as XM.s larger OEM base ramps up installs.
SIRI trades at $677 per 2007E sub and $539 per 2008E sub.. These values compare to XMSR.s $545 per 2007E sub, and $447 per 2008E sub . a 24% and 20% difference. Our DCF analysis implies 74% outperformance relative to the market over the next 12 months.
We maintain our Outperform rating on SIRI even without M&A potential with XMSR. We believe SIRI can outperform based on its FCF potential alone. Compared to XMSR, 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