By James Goss
The Alexander Paris Report
We reaffirm Outperform rating and maintaining our price target of $4.50 for Sirius Satellite Radio Inc. (Nasdaq: SIRI). This target is based on the price level SIRI could reach over the next year while still providing about 20% compound annual growth through our price objective for 2011. While operations as a separate public company remain very important, the potential merger with XM is also a key valuation element. We are increasingly confident the merger will take place, particularly in light of the substantial support that has been voiced by underserved interests. The vote is November 13.
Sirius reported Q3/07 EPS of $(0.08), in line with consensus and a penny below our $(0.07) estimate. The primary difference was in higher overall gross additions than we had estimated, which, in turn, resulted in a higher level of total subscriber acquisition costs than we had allowed despite a lower rate of SAC per gross additions than we had estimated.
Emerging success in the OEM subscriber area is setting the tone in subscriber additions. Of the 525,000 net subscriber adds in Q3, 461,000 were on the OEM side and only 64,000 were from retail aftermarket channels. The fourth quarter tends to have a higher relative share from retail, reflecting a combination of less seasonality in new car sales and the use of satellite radios as Christmas gifts.
Sirius reaffirmed its full year guidance levels close to $1 billion in revenues, more than 8 million year-end subscribers, average churn in the 2.2% to 2.4% range and SAC per gross addition declining to approach $100. Management also expects to be free cash flow positive in the fourth quarter and noted that it is fully funded to cash flow breakeven with or without a merger. Cash is currently $362 million.
Sirius claims to be generating a higher share of satellite radio net additions in both the retail and OEM business channels. Both XM and Sirius have observed a definite higher degree of momentum on the OEM side, which could be borrowing from the retail potential as an increasing number of cars provide either factory equipped or dealer-installed satellite radio options. Importantly, Sirius continues to leverage its platform, noting that fixed costs rose less than 6% while revenues rose 45%, continuing recent trends.
Editor's Note: James Goss is an analyst with Barrington Research Associates, Inc., publishers of The Alexander Paris Report, 161 N. Clark St., Ste. 2950, Chicago, IL 60601, 1 year, 12 issues, $195.
Barrington Research Associates is a brokerage firm that provides economic and investment research to institutional investors, including most of the leading mutual funds, banks and other professional investors. For more information on The Alexander Paris Report call 1-800-416-7479.
