Credit Suisse analyst Bryan Kraft downgraded Sirius Satellite Radio 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 - (SIRI)DOWNGRADE RATING

What To Do With Sirius?

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 caseyields $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 apositive 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 beoffset 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 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 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.

Position - Long Sirius/XM