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Wednesday, May 31, 2006

Sirius's Dead Cat Bounce

Stocks: (SIRI)(XMSR)(GOOG)(CBS)(AAPL)

After a sharp drop from its December 12, 2005 high of nearly $8, the shares of Sirius, the big satellite radio provider and home of Howard Stern, dropped to $3.68 on May 24. The company then ran through a week of great news. First, Sirius reaffirmed that it would end the year with 6.2 million subscribers, up 87%, while its rival, XM, cut its forecast for their end of the year subscriber base. Then, several banks, including Bear Stearns and Oppenheimer, made positive comments. Sirius then settled its long-running dispute with CBS over Stern's departure. For the paltry sum of $2 million. Then, news came that Sirius's CEO was buying stock. And, to top it off, XM suspended shipping some of its radios because of concerns at the FCC.

Naturally, the Sirius share price rose and hit $4.51. With all the good news, investors might have expected a bit more.

What happened? The story behind the story at Sirius is still not good. Morningstar has a "fair value" estimate on the stock of $2.00, and does not recommend buying shares unless they drop to $1. Wow. The thesis supporting this low valuation is that XM has a significant edge in terms of the chips it uses, and that the number of competitors that are vying for the consumer's entertainment time is growing at lightning speed.

There is some merit to both arguments, but they do not go far enough. It is true that the chipset that Sirius uses does not allow it to easily created smaller, more flexible portable devices. It is also true that everything from the Apple iPod to old-time over-the-air radio competes for listening time.

But, Sirius has more serious problems. Despite its troubles, XM still has a considerable lead over Sirius. The larger company expects to have 8.5 million subscribers at the end of this year, a lead of almost 40%.

Another issue is the valuation of the Sirius stock. The company has a market cap of $6.3 billion to $3.7 billion for the larger XM. According to Yahoo!Finance, Sirius also trades at about 19 times sales. Google can only manage 16x.

Sirius is also not helped by the fact that in the last quarter, ending March 31, the loss from operations was $446.2 million on revenue of $126.7 million. Cash and cash-equivalents have fallen to $630.8 million and long-term debt is $1.084 billion. Between this debt and contracts for items like satellite time, the company has obligations of over $2.6 billion.

With all of this headwind, the Sirius 10-K may state the market's concerns more eloquently than outsiders can: "Our business might never become profitable".

Sirius's 200-day simple moving average is about $6.00, and, given the skepticism that has built up around the stock, even with recent good news, it may not be back there again for a long, long time.


Douglas A. McIntyre
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