Orbiting Wall Street

By | February 27, 2006 | Broadcasting, Feature, Telecom

SIRI, XMSR

With the Howard Stern sales blitz history and the companies reporting their 2005 performance, Wall Street is offering projections for the stock performance of Sirius Satellite Radio and XM Satellite Radio in 2006.

The stock of both satellite radio companies has been rated "outperform" by Bear Stearns & Co.

"Despite [fourth quarter 2005] results that were either in line or better than expectations on most metrics, [Sirius] stock declined significantly after reporting likely due to the lack of very near-term catalysts," Bear Sterns said in a research report. Translation: Sirius stock appears to be undervalued by the market.

A few more points in favor of better-than-expected 2006 performance: Fourth quarter "gross adds and churn virtually in line," Bear Stearns said. "The company expects to end 2006 with more than 6 million subs, with market share parity at retail and more than doubling of the OEM subs base in the year." Combined with the anticipated launch of portable radios this summer capable of receiving live signals as well as playing MP3s, and things are looking up for the once embattled Sirius. At press time, Sirius stock closed at $5.22 a share Feb. 23 after ending 2005 near the $7 mark.

Despite ranking XM stock the same as Sirius, Bear Stearns is not quite as bullish on the larger of the two U.S.-based satellite radio providers.

"XM shares have declined about 20 percent from their highs in early January 2006 to levels not seen since 2004," Bear Stearns said in a research report. "We think investors have an interesting question to ponder: ‘Is XM on a further slide from these levels? Or has the stock bottomed out, the price climb back up the mountain is coming, and it’s a good time to build a position?’"

XM’s stock drop is tied to a few factors, including the impact of Howard Stern’s arrival at Sirius, a weak fourth quarter at XM partner General Motors . Meanwhile, the resignation of XM director Pierce Roberts over a disagreement about the company’s corporate strategy has not helped investor confidence either, especially with Roberts used phrases in is resignation letter such as, "I believe that XM will inevitably serve its shareholders poorly without major changes now."

This said, both Bear, Stearns and Lehman Brothers ,which has rated XM’s stock as "overweight," expect XM to do better than the pessimists expect.

"We think management is taking the company in the right direction — building for the longer term and creating a critical mass of subscribers that should have a network or reinforcing effect," Bear Sterns said.

"While [the fourth quarter of 2005] was mixed … we expect the company to better balance growth and profitability going forward and to benefit from an improved competitive environment, now that the initial launch of Stern is complete at Sirius," said Vijay Jayant, Lehman Brothers cable, satellite & entertainment analyst.

XM stock, which lost more than $3 from Feb. 15 to Feb. 22, closed at $22.24 Feb. 23.

ETL.PA

After meeting with Eutelsat management, looking over its satellite fleet and assessing the satellite operator’s ability to reduce its number of orbital positions, Morgan Stanley Equity Research has declared that this company’s stock is "getting warmer" but stopped short of raising its rating from the current "equal weight."

"We continue to believe … that the stock will struggle to attain fair value while the overhang from private equity shareholders remains," Morgan Stanley said.

DTV, DISH

Rumors and speculation continue to swirl around reputed plans that DirecTV and Echostar Communications Corp. will launch a terrestrial wireless broadband service across the United States rather than deploying a version of satellite broadband.

Given that the current direct broadcast satellite infrastructure for both companies is downlink only, offering a two-way broadband service is essentially a "from the ground up" project that will require an entirely new set of carrier and customer premise equipment to put into service, said Vijay Jayant, Lehman Brothers’ cable, satellite & entertainment analyst. In a research report, Jayant estimated that the joint venture likely will require $750 million to $1 billion in investment "along with the participation of a technology partner and a spectrum provider."

This is likely why the companies are looking at going terrestrial rather than satellite, since the former can be deployed more quickly and without having to launch more satellites. A quick option makes sense, Jayant said. "DBS providers’ interest in the broadband market is primarily a defensive effort to protect their core video service against triple play offerings from cable and (eventually) telcos. By launching a broadband offering, DBS providers could offer not only broadband data, but also VoIP and improvements to the core video service."

Adding wireless broadband coverage of U.S. urban and semi-urban areas, which account for 67 percent of the U.S. population, would require a $2 billion upfront cash investment for base station equipment and installation, Jayant said. Adding customers would require incremental investments for customer premise equipment ($150 to $250 per subscriber), with an estimated cost of $700 per sub, Jayant said.

–James Careless

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