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Monday, July 31, 2006

Sirius Radio's Dead Cat Bounce

Stocks: (SIRI)(XMSR)

Share of Sirius jumped up 4% on new that it had signed a deal to put it products in Mitsubishi cars. Not all of them, just four models.

Now, Mitsubishi sells about 8,000 cars a month in the US, so the arrangement is with one of the smallest car marketers in North America.

With the Sirius stock at $4.30 on a 52-week high/low of $7.98/$3.60, almost any news about distribution of the company's products is good news.

But, Sirius still trades at 18 times its revenues, and that is probably too expensive.

Rival XM Satellite recently reported a loss of $232 million for its last quarter. Revenue did grow 82% to $228 million, but the company cut its year-end subscriber target. XM has set a goal of being profitable by the end of 2006, but management stated after its poor performance last quarter that generating cash in Q4 would be more of a challenge.

The market often assumes that what is bad for XM is good for Sirius. Not necessarily. Several analysts have suggested that the behavior of XM subscriber base will be the same for Sirius as its base gets closer to 7 million users. That would mean a higher churn rate. The theory, which will not be proven until Sirius grows some, is that once a base of customers hits a certain level, higher cancellation rates are inevitable.

Wall St. continues to have concerns that Sirius may have to raise more money to reach profitabilty and dilute its already huge count.

One thing is certain. Most of the large car companies are now partners with one or both of the satellite radio companies. Investors can tell that when a Mitsubishi deal rates press.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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