investingfromtheright

I am retired and take educated guesses on all things financial.

January 16, 2007

January 17, 2007: Satellite radio... "Stern" advice

Research reports indicate a change of course for the future of satellite radio. It is getting brighter, especially if Sirius (SIRI) and XM (XMSR) merge with an estimated cost savings of $10.5 billion based upon what seems to be a conservative model.

Satellite radio is here to stay. The teenage through college market, the next generation, expect satellite radio to be installed in their vehicles. The transportation industry, ditto. More and more, the service industry will turn to satellite radio for appropriate musical settings. The quality of satellite radio is excellent and getting better. The price point of entry is low. And, it serves an entertainment void similar to what am talk radio filled in the 1990s and then some.
In short, underlying demand and customer satisfaction is strong. The key barrier is trial, which should improve with increased consumer awareness and OEM installation rates.

From today's stock price, one analyst, no shill for the group, sees a 12% upside for Sirius and a 50% upside for XM this year. With a merger, I think that the upside rises to 20% and 68% respectively. It is possible that a combination of the two networks could be announced this year, which is an advantage coming before the 2008 elections. Of course, there is still a regulatory risk. Chance of a problem? Flip a coin. I would bet that each company is placing political bets in no small measure. And there are pro-consumer arguments to be made (more programming, ability to access both services by not being locked in at point of purchase in the auto showroom).

Satellite radio is an industry with strong ,not outstanding secular growth. Another analyst estimates that there will be 17.7 million subscribers in 2007 (13 million in 2006) and conservatively 29 million in 2010 and 45 million in 2015. Satellite radio can grow revenue through advertising growth and modest price increases. Satellite radio, merge or not, will likely be profitable to a degree by late 2008.

All said, there is money to be made in the satellite radio business, and money to be made in their investment vehicles. Short of buying stock in either company, I would strongly recommend you look at their financial paper, especially the SIRIUS Senior Note 9.62% 08/01/13 #82966UAK9 trading at $98.38. It is rated junk, but is worth the risk, in my opinion. It also possesses an enviable call feature. I have recommended this security on more than one occasion and own it in my speculative portfolio.

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