Merrill Lynch analyst Jessica Reif Cohen issued a critical report on Sirius XM Radio today. The media analyst notes that the auto sales for 2008, and even 2009 appear to be troubling for satellite radio as the OEM channel has been an integral part of the growth of satellite radio.

Cohen has lowered her projections on subscribers, noting, ” 1) September’s broad decline in US retail (lowest in 3 years); 2) soft electronics sales with Best Buy posting -2% September comp; 3) ML lowered US auto forecast for ‘08/’09 to 13.8mn/12.5mn vs. current SIRI guidance of 14mn; and 4) credit crisis has made SIRI ’09 refinancing prohibitive.”

The analyst lowered net adds by 47k to 409k, which represents a down 51% year over year comparison. She has also adjusted ARPU to $10.47 from $10.53, and has trimmed revenue by $7mn to $611mn (+15.4% Y/Y).

Cohen feels that dilution is likely as SIRI uses equity to save the balance sheet. Jessica notes, “Given illiquidity of the High yield and levered loan market, SIRI CEO Mel Karmazin has been obligated to use SIRI equity through debt swaps to take out pending maturities. The primary benefit is the extension of optionality to the extent a restructuring (i.e. bankruptcy) is averted, however, it comes at the cost of dilution.”

Cohen maintains UNDERPERFORM and has Lowered her price target to $0.25. Cohen has joined other analysts who now see weak auto sales as another hurdle for satellite radio to negotiate. Between low auto sales, and a credit market than can only be described as terrible, she and other analysts see real challenges for the company. Should the company be successful in renegotiating their debt, and should auto sales turn around, then, and perhaps only then will the analysts on the street sing a new tune.

With Sirius XM Radio due to announce their Q3 numbers soon, it will be interesting to see not only the reaction of the street, but analysts as well.

Position: Long SIRI