Stifel analyst Kit Spring is the first analyst to make note of retail sales for SDARS being better than expected. As Sirius Buzz pointed out earlier today, the retail channel is showing improvement that is better than most analysts had been projecting. Additionally, Spring still sees merger synergies that approach the $5 Billion range. An interesting item to note is that Spring feels Sirius and XM overpaid for all talent except howard Stern, which they feel is a profitable deal.
Auto Weakness; but RetailImprovement; Still See Synergies
1Q auto sales were weak, down about 10% for the Big 4 in 1Q. Though because penetration increased faster,both SIRI & XMSR should show growth in gross additions in 1Q. We are lowering 2008 subscriber estimates toaccount for expectations of continued weak auto sales. We believe investors have already focused on weak autosales.
1Q retail will be down, but looks substantially better than expected according to latest NPD data: Overall retailsales were -14% for the month, the third straight month of sequential improvement, for a 1Q total of -16%, much better than our expectation of -34% and -36% in 4Q.
We continue to see dramatic merger synergies - in the vicinity of $4.8B. Our pro forma models are attached. Weestimate the combined entity will be FCF positive next year and produce about $0.40 FCF in five years. A market multiple on the latter discounted back to today yields our $4 stock price.XMSR & SIRI are over 20% lower since DOJ approval. The market is far too pessimistic about potential FCC conditions, merger synergies, and the underlying business model, in our view. We think investors will expand their time horizons and optimism as the economy pulls out of a recession.
FCC approval, XMSR debt refinancing, and company outline of merger synergies could provide significantnear-term catalysts. We see the financing likely as the vast bulk would likely require only a change in terms rather than new debt, and a merger is in the best interest of both equity and debt holders, in our view.
Higher churn due to consumer weakness is our biggest near-term concern.
1Q auto sales were weak (though we still see increasing OEM penetration): The OEM channel will likely benegatively affected by weakening auto sales, with the Big 4 auto makers 1Q unit sales being down in the high single tolow double digit range. Given potential for the economic downturn to linger, we have lowered our OEM sales assumption.
March NPD data shows continued weakness in the retail channel, but was substantially better than expected: Data from the NPD Group, a consulting firm, show Sirius (SIRI, Buy, $2.45) retail sales down 5% and XM Satellite Radio (XMSR, Buy, $10.73) down 26%, compared with SIRI down 19% and XMSR down 19% in February. The market share split was 64%/36% SIRI/XMSR, versus 67%/33% for SIRI/XMSR in January. Overall retail sales were down 14% for the month, the third straight month of sequential improvement, for a 1Q total of down 16%, much better than our expectation of down 34%. These numbers give a good directional guide to the companies retail sales, in ourview; however, they do not include the companies direct sales channels, both of which may be gaining market share.The companies have tended to outperform the predictions of the NPD data recently, particularly XMSR.
Tyler Savery Position - Long Sirius, Long XM