Wall Street Analysis

By Tom Watts, SG Cowen Securities

Proceeds from an expected $150 million equity offering by Sirius Satellite Radio [Nasdaq: SIRI] should fund programming and distribution initiatives to help accelerate its business plan. The offering, set to close Nov. 24, reinforces our view that both Sirius and XM Satellite Radio [Nasdaq: XMSR] will continue to tap the capital markets opportunistically. We believe it is wise for Sirius to raise a cash cushion at a time when the capital markets are receptive. This could avoid distress later if subscribers sign up more slowly than expected or if costs rise.

We expect that programming initiatives from Sirius could include major radio personalities such as Howard Stern or Don Imus and/or a deal with the NFL, similar to DirecTV’s Sunday Ticket. Distribution initiatives could include new aftermarket channels, possibly Wal-Mart Stores [NYSE: WMT] or Target [NYSE: TGT]. But more than the distribution channel needs attention. Maybe Sirius’ product offerings need a boost, too. We estimate Sirius’ aftermarket share is only about 24 percent of XM’s. It is apparent that Sirius’ aftermarket products are having difficulty gaining traction. The much-heralded Kenwood plug-and-play unit, introduced in June, apparently had little effect on third quarter numbers. Perhaps Sirius’ research and development program will get a lift with the stock offering’s proceeds.

Also, we believe that more attractive incentives could be forthcoming to spur Sirius’ original equipment manufacturer (OEM) sales. Sirius should announce the new initiatives within the next two quarters. This could become a potential catalyst for the stock. Subscriber effects could begin as soon as the first quarter of 2004, just as stepped-up OEM programs ensue.

We believe Sirius must demonstrate better OEM results before its stock price will improve. Investors probably need to wait for the first quarter before significant evidence of heightened OEM contribution becomes visible.

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.