A Higher Orbit for XM?


By Tuna Amobi, CPA, CFA On Apr. 11, in the latest salvo in the highly competitive contest for dominance in satellite radio, XM Satellite Radio (XMSR

; recent price, $31.02) and the America Online unit of Time Warner (TWX

; $17.96) announced plans for a summer 2005 launch of a co-branded online radio service. XM will also integrate select original programs of AOL Radio Network into its traditional service.

We at Standard & Poor's Equity Research Services think this could be a positive for XM. With AOL's more than 100 million unique monthly visitors per month, this online offering should provide another platform to create awareness for XM's service, and potentially add to long-term subscriber growth through the automotive and retail channels. Also, we believe this move should create another key service point of differentiation between XM and its chief rival, Sirius (SIRI

; $5.45).

BASEBALL, TOO. In the wake of the AOL announcement, we have reiterated our 3-STARS (hold) opinion on XM shares. (S&P maintains a 3-STARS opinion on Sirius and a 4-STARS, or buy, recommendation on Time Warner.) We believe XM's stock price already discounts market expectations of significant subscriber growth in the foreseeable future, as it recently reiterated its long-term target of 20 million subscribers by 2010.

Crucial to our outlook are XM's key commitments with automotive partners General Motors (GM), Honda (HMC), and Toyota (TM), and the addition of premium and popular content, including XM's recently launched Major League Baseball channel.

After recent notable product launches, including NavTraffic, SkyFi, and Roady, and with early signs of the strong performance of the portable Delphi XM MyFi at the retail channel, we think XM is well positioned to further expand into the portable and handheld device market, with the development of next-generation chipsets. Separately, we see a potentially sizable long-term market opportunity for addressable advertising, with XM's inventory of more than 60 nonmusic channels.

LIST OF RISKS. Our 12-month target price of $35 is based on our

discounted cash-flow analysis, assuming an acceleration in free cash flow in 2007 and beyond, following our projection that XM will break even by late 2006.

Risks to our opinion and target price include continued losses and the absence of free cash flow; increased competition for customers, talent, and programming; loss of service due to satellite anomaly; and regulatory factors.

Note: Tuna Amobi has no stock ownership or financial interest in any of the companies in his coverage area. All of the views expressed accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed. Price charts and required disclosures for all STARS-ranked companies can be found at www.spsecurities.com

Required Disclosures

5-STARS (Strong Buy): Total return is expected to outperform the total return of the S&P 500 Index by a wide margin, with shares rising in price on an absolute basis.

4-STARS (Buy): Total return is expected to outperform the total return of the S&P 500 Index, with shares rising in price on an absolute basis.

3-STARS (Hold): Total return is expected to closely approximate the total return of the S&P 500 Index, with shares generally rising in price on an absolute basis.

2-STARS (Sell): Total return is expected to underperform the total return of the S&P 500 Index, and share price is not anticipated to show a gain.

1-STAR (Strong Sell): Total return is expected to underperform the total return of the S&P 500 Index by a wide margin, with shares falling in price on an absolute basis.

As of Dec. 31, 2004, SPIAS and their U.S. research analysts have recommended 26.5% of issuers with buy recommendations, 61.3% with hold recommendations, and 12.2% with sell recommendations.

All of the views expressed in this research report accurately reflect the research analysts' personal views regarding any and all of the subject securities or issuers. No part of the analysts' compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

Additional information is available upon request to Standard & Poor's, 55 Water Street, New York, NY 10041.

Other Disclosures

This research report was prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"), and may have been provided to you either by: (i) Standard & Poor's under a license agreement with The McGraw-Hill Companies, Inc., which holds the copyright to this report; or (ii) a Standard & Poor's client who is granted a sub-license by Standard & Poor's. This equity research report and recommendations are performed separately from any other analytic activity of Standard & Poor's. Standard & Poor's equity research analysts have no access to non-public information received by other units of Standard & Poor's. Standard & Poor's does not trade in its own account. SPIAS is affiliated with various entities, which may perform services for companies covered by the recommendations in this report. Each such affiliate is operationally independent from SPIAS.

Disclaimers

This material is based upon information that we consider to be reliable, but neither SPIAS nor its affiliates warrant its completeness or accuracy, and it should not be relied upon as such. Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Analyst Amobi follows shares of radio broadcasters for Standard & Poor's Equity Research Services


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