RBC analyst David Bank issued a report today on Sirius Satellite Radio. The analyst rates Sirius as sector perform with a price target of $3.00
1Q08 Earnings Mixed As FCC Keeps SIRI Waiting
Probability Of Transaction Completion High, But Conditions Unknown And Fundamental Upside Limited—SIRI continues to execute according to plan, but given relatively challenging environment (anemic retail demand, slowing auto sales, tough consumer economy) we don't see much fundamental upside outside of merger arb trading right now. Given DOJ approval already granted, last remaining hurdle to merger completion is FCC approval process. While we believe probability of deal completion > 70% and NPV of synergies $4bn, we also think current stock price is discounting this and would remain on sidelines.
Furthermore, conditionality ultimately required by FCC could eat into synergy values. Maintain SP and $3 price-target.
Weakness Persists At Retail—Total net adds of 323k came in-line with consensus of 326k. Weak retail net adds of 2.5k (management attributed weakness to consumer macro and merger confusion) were offset by stronger than expected OEM net adds of 321k vs our 236k estimate. Notably, we estimate that gross retail adds were likely down 30%+ y/y and SIRI narrowly missed delivering negative retail net adds, something we suspect is a possibility in2Q/3Q—seasonally weak retail quarters.
Seasonally High Churn Exacerbated By Growing OEM Channel—SIRI missed our 2.6% churn estimate slightly at 2.7%. Management attributed higher churn to OEM channel growth relative to retail; because OEM churn includes conversion rate, it is naturally higher and as mix shifts, it has a greater impact on overall churn. Although growing OEM penetration is by itself positive, we'd expect this trend to continue in the near-to-intermediate term as OEM penetration continues to ramp (Chrysler 70%+, Ford expected 70% for FY09).
Held Hostage By The FCC—Having received DOJ approval for pending XMSR merger on March 24th, SIRI now awaiting approval from FCC. Despite mobilization of multiple special interest groups to lobby FCC against approval,we believe FCC will ultimately grant approval. However, "conditionality" could be onerous., i.e., FCC may force XMSR/SIRI to offer some spectrum to 3rd party(and thus competitor) or it may mandate installation of HD Radio chips in satellite receivers, etc. This could ultimately augur additional competitive forces counteracting merger synergy benefits. It's unclear when FCC will rule and what pound of flesh it will extract.
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Position - Long Sirius, XM.