Orbiting Wall Street

Analyst Bullish On Satellite Radio Stocks

Wall Street analyst Bear Stearns & Co. placed an "outperform" rating on both Sirius Satellite Radio and XM Satellite Radio.

Looking back at Howard Stern’s impact on Sirius’ fourth quarter 2005 subscriber sales, the company’s year-end report of 3.3 million subscribers is "significantly ahead of our 3.1 million estimate, and accounting for 56 percent of the 2 million net additions to the industry in the quarter," according to a Bear Stearns Equity Research report issued Jan. 24. The fourth quarter 2005 "was the first quarter in which Sirius garnered more than 41 percent market share of net additions, driven by Howard Stern’s transition to Sirius in January 2006. We understand that in Howard Stern markets in the Northeast, Sirius radios were sold out in many stores."

Bear Stearns expects "The Stern Effect" to continue to remain exceptionally strong through the first quarter as more fans subscribe to Sirius. It is worth noting that the 1.14 million subscribers added by Sirius in the fourth quarter is "about as many as the number of subscribers it had at the beginning of 2005. We are expecting gross add of 1.3 million based on churn of 1.6 percent."

XM ended 2005 with 5.9 million subscribers and net reported subscriber additions of about 900,000 during the fourth quarter, said Bear Stearns, "which was below our expectations as well as previous guidance." XM subsequently announced in early 2006 that it had passed the 6 million sub barrier.

Intriguingly, "XM reported that more than 85 percent of the net new subscribers were from the retail channel" during the fourth quarter 2005, which means in-car sales were not as big a factor on subscriber additions.

"We believe [the original equipment manufacturers] contribution was significantly lower than expected for two reasons," said Bear Sterns. First, General Motor’s (GM) "significantly discounted promotions earlier in [2005] likely had the effect of pulling the demand" for cars equipped with XM radio to prior quarters. The early surge in car buying then meant that "the number of disconnects from the GM platform would have been higher [in the fourth quarter] on an absolute basis simply because GM contributed a much higher proportion of gross additions" in the second and third quarters.

As for XM’s fortunes in 2006? Bear Stearns is predicting a "gross add of 1.3 million based on all-in churn of 3 percent" based on new products that "could help it enter the portable digital music player market." XM unveiled four new portable radios Jan. 4, including a pair of units that can receive live XM signals as well as play stored digital music files.

At press time, Sirius stock was selling at $5.92. falling below $6 for the first time since October. The stock has a 52-week high of $7.98 and a low $4.42.

XM stock was priced at $27.17 and has been declining steadily since reaching $29.94 Jan. 9. XM has a 52-week high of $37.31 and a low of $26.16.

Has DBS Peaked?

Has the DBS market reached a saturation point? That’s the question Bear Stearns raises in its Jan. 24 report on DirecTV.

Bear Sterns lowered its predictions for DirecTV‘s fourth quarter 2005 net subscriber additions to 330,000, down from the previously expected 345,000. The firm ascribes this lower total to two factors: a "stricter credit policy, as well as the fact that gross additions to the DBS platform may be declining."

While lowering its subscriber expectations, Bear Sterns still expects DirecTV U.S. to report revenues of $3.4 billion, up more than 15 percent from a year ago and EBITDA of $300 million, up 160 percent. Both numbers are higher than Bear Sterns previous expectations due primarily to higher revenues and lower than expected programming expenses.

DirecTV will report its 2005 performance Feb. 8.

The costs of adding high-definition TV and possibly broadband services to compete against packages offered by cable and telephone operators will cut into DirecTV’s pocketbook in the immediate future. Nevertheless, should the company choose to repurchase 216 million shares of stock currently owned by GM Pensions, Bear Sterns believes DirecTV stock price could go up by as much as $2 per share.

DIRECTV stock, rated "peer perform" by Bear Sterns, has been above the $14 mark since Dec. 22, and was priced at $14.04 at press time, with a 52-week high of $16.79 and a low $13.17.

Echostar Communications Corp. also received a "peer perform" rating from Bear Stearns in a separate report issued Jan. 24. Though Echostar’s 12 million subscribers at the end of 2005 were "lower than out 12.1 million expectation," the analyst said.

Picking up on concerns raised in its DirecTV report, Bear Sterns said, "Based on our estimate of churn, 2005 is the first year that gross sub adds have declined. The primary reasons, in our view, are the expanded availability of cable’s triple-play bundle and the value proposition inherent in the offering." To keep up with competitors, "Echostar will need to partner/invest in a broadband initiative like WiMAX or BPL to ensure its offering remains competitive," said Bear Stearns. As with DirecTV, Echostar is expected to invest substantially to make the transition to high-definition TV. "In addition to the financial outlay, the transitions could tax operational and installation capabilities."

Echostar’s stock price stood at $27.20, with a 52-week high of $32.33 and a low of $24.44.

–James Careless