Lehman Brothers analyst James Ratcliffe issued a report today maintaining his overweight opinion on Sirius XM Radio, but adjusting his price target to $2.10. The analyst sees some bullish aspects of satellite radio which derives a price target of $3.19, but also has caution in certain areas as the business of satellite radio moves forward as a merged company which yields a $1.19 target.

Ratcliffe is expecting Sirius XM Radio to move aggressively to generate synergies across their cost structure. The analyst sees the push-marketed business model of the OEM segment to be attractive, something I had covered in a previous article titled "OEM Has A Chance To Deliver $$$ To SDARS". While I see the attractive nature of push marketing, there still needs to be consumer pull. At this point, with Take rates above 50%, it appears that the desire for satellite radio from consumers is strong enough that push marketing could take the concept over the top.

Ratcliffe noted that the merger process was a distraction, and that refinancing costs increased the interest burden, but views the transaction as worthwhile(near-term savings around $400MM+/year, $800MM long term).

The analyst maintained their rating, but brought down the price target to reflect a conservative stance on some aspects of the company going forward. Ratcliffe sees $460MM in 09E merger synergies, which is above the $400MM guidance issued by Sirius XM. However, he notes that the EBITDA and pre-satellite capex FCF are below company issued guidance ($250MM and $(36)MM loss vs. $300MM and positive guidance, respectively).

Lehman ran a bull case and bear case scenario on their valuation, based on varying the terminal conversion rate, SAC for used car reactivation, timing and success of GM contract renegotiation, overall SAC, and the rate paid on 2009 debt refinancing. Lehman's bull case valuation yields a $3.19 YE 2008E fair value (50% above our base case) while our bear case yields a $1.19 fair value (44% below our base case).

Other points by Ratcliffe include:

  • OEM will be the driver for subscriber growth.
  • Retail will be a small contributor
  • FCC concessions unlikely to have a negative impact on the company.
  • Credit markets in 2009 may be slightly better, but company should have a cost cutting track record and should be able to obtain the financing needed.

Position - Long SIRI