In an interesting report issued today, UBS has downgraded both Sirius and XM from Buy to Neutral, but at the same time raised the price targets of both companies. Reaction on the street in early trading seemed to focus on the fact that the report was a downgrade rather than on what was stated in the report. It is unclear though whether the street reaction is based on the UBS report, or the combination of this report and the news surrounding the Wisconsin Attorney General.

The report downgraded based on valuations of FY 2008, and the equities approaching and/or surpassing UBS's price targets. Now at a neutral rating, UBS is looking for Sirius to go to $3.90 (up from previous target of $3.75 established in July) and XM to $16 (up from a previous target of $15) in terms of stock price. FY 2008 EPS projections, according to UBS were adjusted for Sirius from a loss of $0.40 cents to a loss of $0.42 cents. For XM the estimated EPS was adjusted from a loss of $1.68 to an improved $1.61.

UBS has basically taken an approach that the chances of a merger are about 50/50, and that the upside and downside (as it relates to a merger) from current levels offset each other, thus a neutral stance. For Sirius, Bookbinder sees a potential 23% upside and a 19% downside. On XM the analyst sees and upside of 33% and a downside of 29%. The valuations established in the report are based on these companies in a stand alone model. If you are a believer in the merger, then there is still upside in the UBS number. If you believe that the merger fails, then there is a downside in the UBS number. The approach by UBS is conservative in that it is not really taking a position on the merger, or the impact on the stock price regarding a merger decision in either direction.

We have report excerpts in the Sirius Buzz Forums, where readers can see more detail, and post their comments:

UBS Sirius Report

UBS XM Report

Tyler Savery Position - Long Sirius, Long XM