Wall Street Analysis

By Tom Watts, SG Cowen Securities

XM Satellite Radio [XMSR] plans to report fourth quarter results this week but the pioneering carrier erased much of the suspense by pre-announcing a Jan. 8 subscriber count of 360,000. Few startups have hit their operational milestones as consistently as XM. We believe the company’s excellent programming across its 100 channels differentiates it sharply from traditional AM and FM radio and ensures it a successful future. The company currently seems on track to surpass one million subscribers by the end of this year. We project five million by 2007.

A 16.9 percent jump in XM’s share price March 19 on heavy volume suggested some news might be on the horizon. We heard reports that Clear Channel could be looking at increasing its investment in the company. If that happens, it would be a further endorsement of XM by an existing shareholder that is in the traditional radio business and understands the competitive landscape.

XM’s greatest short-term risk, ironically, may be the slow start of its competitor Sirius Satellite Radio [SIRI]. Delays on the part of its equipment suppliers have left Sirius sales almost a year behind XM. Sirius, for example, finished 2002 with just under 30,000 subscribers. We think that satellite radio will benefit most from two innovative competitors, not just XM’s success. Even XM management agrees the industry will benefit from competition. With Sirius now available on a number of BMW models and 16 different models of Chrysler, Dodge and Jeep vehicles, Sirius should begin to gain momentum. Its second-generation chipsets also should help reduce the size and cost of its units to spur demand.

Many people still question the market size for XM and Sirius. If you are among them, you should visit your local Circuit City [CC] or Best Buy [BBY] and listen to a few of the XM or Sirius channels – Ethel on XM and The Vault on Sirius are two of my favorites. As the companies prove that their economic models work, you may become believers in the stocks as well.

Tom Watts is a managing director and satellite analyst at SG Cowen Securities. He can be reached by phone at 212/278-4260 or by e-mail at [email protected]. Readers should assume that SG Cowen Securities Corp. and/or its affiliates intend to offer services in investment banking to the above referenced companies within the next three months, and to seek compensation for such services.