merrill lynchML analyst Mancini issued a report today with a change in estimates and a $5 price target for Sirius.

Reason for Report: Estimate Change

Merger or not, SIRI is undervalued

We are reiterating our Buy on SIRI with a $5 PO, yielding 72% potential upside. In our view, shares are oversold given Street expectations for little, if any, probability the proposed XM merger will get approved (MLe 60% probability) and the lingering impact of concerns about retail demand, long-term churn, and conversion of promotional subs to self-paying. We continue to believe the shares have upside potential using our reasonable, and often conservative, assumptions, including:

  1. 80-85% of long-term gross adds are from auto
  2. declining ARPU (ignores data impact)
  3. combined 40mm subscribers in 2014 - comments by both SIRI and XM suggest this level in 2010
  4. annual FCF exceeds $1bb in 2016 - six years after SIRI had suggested prior to the announced merger agreement with XMSR.

We forecast churn remains stable, 50% of auto subs convert to self-paying and CPGA declines over time. Our estimates and PO ignore the benefits of the proposed merger, which we estimate could increase SIRI's fair market value by another $1.40/sh. While we are largely maintaining our 2Q07 and FY07 ending subscriber forecasts, we are reducing our gross addition and churn estimates, which result in reduced SAC and EBITDA deficit estimates. We forecast 2Q07 revenue of $229mm ($949mm for FY07), ending subs of 7.1mm (8.2mm for FY07), and EBITDA deficit of $88.1mm, down from $90.2, in 2Q and $329.9 down from $347.7, for FY07.

Mix trends to OEM; Competition from Internet radio

MLe 58% (up from 47% in FYO6) of total FY07 gross additions for the satellite radio industry will come from the OEM channel, with SIRI installs accounting for ~44% of these additions. Internet broadcasting is an intriguing and meaningful competitor which reaches 29mm a week (according to Arbitron and Edison Research), but fails to reach the important captive auto audience with a live feed.
Position - long Sirius, long XM