Analyst William Kidd of Wedbush issued earnings preview reports on Sirius and XM today. Wedbush sees Sirius as a buy with a $3.50 target and XM as a sell with a $9.00 price target. Obviously these targets are established with the companies as separate entities. If an investor felt that the merger would pass, they might consider buying into XM because the arbitrage is very attractive at this point.
SIRIUS REPORT EXCERPT
2008 Guidance Likely Encouraging
2008 guidance should garner most of the attention as opposed to earnings when Sirius reports in February.
We are expecting Sirius to guide to at least 10 million subs for 2008 vs. our 10.2 million forecast up from 8.3 million subs in 2007. Cash flow guidance should be the other key area, with the question being whether or not Sirius guides to being free cash flow positive for the year. However, even though we are not expecting the company to turn FCF positive until 2009, we still expect marked improvement in 2008. Our projected free cash flow trend has tended to be more conservative than our perception of management’s expectations. Consequently it would not be inconceivable if the company guides to positive free cash flow in 2008, assuming no merger. All that said, we would be disappointed if the company backed away from stand alone guidance as a result of the merger process.
Subscriber growth is a non-issue since the results are already known.
Sirius earlier reported 8.3 million subscribers at the end of 2007, in line with our estimated 8.3 million subs. We estimate that 4Q gross additions were 1.15 million vs. 999k 3Q07 and 1.23 million in 4Q06. Given ongoing talk of a weaker consumer and the growing potential for weaker car sales, it might not be readily apparent that Sirius posted its highest gross additions ever in 2007. The subscriber preannouncement also de-emphasizes the importance of EPS, assuming no unusual anomalies, since the subscriber announcement already provides considerable insight into the likely EPS result. In terms of 4Q EPS expectations, we are expecting an EPS loss of $0.12 vs. the consensus loss estimate of $0.13.
Other than the still pending merger decision, the potential for weaker OEM sales is the biggest issue.
We expect car sales to fall to 15.5 million in 2008 from 16.1 million in 2007. From that, we infer that Sirius’ OEM subs could be impacted by the same percentage change of down 3.7%. As a result, we are lowering our 2008 OEM gross additions to 2.7 million from 2.8 million, bringing our total 2008 gross additions to 4.4 million from 4.5 million. For perspective, we believe this compares to an estimated 4.1 million gross additions in 2007. In terms of net additions, we are lowering our 2008 net additions to 1.9 million from 2.0 million.
Reiterate BUY and $3.50 price target.
Our $3.50 price target is based on a DCF analysis (see figure 1) and does not incorporate any merger premium/benefit, consistent with our view that the transaction has less than a 50% likelihood of approval and thus, will likely be denied within the month. Importantly, if the merger is approved with modest DOJ concessions, we believe Sirius’ post merger trading range could be near $4.50.Assuming a 25%-45% probability on the merger, we conclude Sirius is considerably undervalued at present levels with some merger consideration.
XM REPORT EXCERPTS
XM Results Likely Lost In Merger Noise
We expect XM to report in-line results in February.
Unlike Sirius, which has already announced subscriber results for Q4, XM will announce its subscriber results and earnings sometime in February. We expect XM to add 472k net subscribers bringing the year-end tally to 9 million subscribers. In terms of 4Q EPS, we are expecting a loss of $0.62 vs. the consensus loss estimate of $0.63.
2008 subscriber guidance should be interesting as we expect 2008 OEM sales to be strong but likely impacted by the weaker macro environment.
We expect car sales to fall to 15.5 million in 2008 from 16.1 million in 2007. From that, we infer that XM’s OEM subs could be impacted by the same percentage change of down 3.7%. Because of that concern, we are lowering our 2008 OEM gross additions to 3.2 million from 3.3 million bringing our total 2008 gross additions to 4.5 million from 4.7 million. For perspective, weexpect 2007 gross additions to be 3.9 million. In terms of net additions, we are lowering our 2008 net additions to 1.4 million from 1.5 million. We are expecting XM to guide to at least 10 million subs for 2008 vs. our 10.5 million forecast.
XM’s losses and cash burn are our biggest concerns.
Extrapolating from XM’s current profitability trends, we do not think that XM is on track to reach either its own or earlier analysts’ expectations to reach cash flow break even in a timely fashion. For perspective, we expect XM to generate negative free cash flow of $148.2 million in 2008 vs. $411.6 million in 2007. If regulators do not approve the merger, we suspect XM’s weak cash flow story will garner even more attention, which would likely widen the valuation differential with Sirius.
Reiterate SELL and $9 price target.
Our $9 price target is based on a DCF analysis (see figure 1) and does not incorporate any merger premium/benefit, consistent with our view that the transaction has less than a 50% likelihood of approval and thus, will likely be denied within the month. When XMSR traded at considerably higher price levels, we argued that XM was an overly aggressive play on the merger decision and should be avoided. At current price levels, we justify our SELL rating on the rationale that we believe Sirius has a better risk to reward trade off given its superior fundamentals.
Risks to attainment of our share price target include shortfalls in subscriber growth;increased competition whether from Sirius; AM/FM radio, HD Radio, or streaming-media services; satellite anomalies; new/increased government regulation; a prolonged and/or failed merger attempt; and an inability to renew key content and OEM contracts
Position - Long Sirius, XM