Tuesday, August 22, 2006

Calls of Note Part 2

- Bear Stearns is out with an upgrade on XM Satellite (NASDAQ:XMSR) taking their rating to Outperform from Underperform. Firm believes that the wave of negative catalysts that have plagued the company over the previous months has finally subsided; in fact, they believe the company is about to experience a positive wave of catalysts, led by the impending FCC authorization for their devices.

After the precipitous decline in XMSR over the past three months, the firm believes that the market has over-adjusted for the concerns in the marketplace.

Firm highlights several Investment Points which support the change in their thesis on the company, including: survey work showing continued strong demand, their anticipation that guidance will be raised, and a bolstered management team.

1) FCC approval for XM's FM modulation units (they would expect in late Aug/ early Sept)

2) The commencement of shipping units for back-to-school / 4Q inventories The unshackling of the marketing rollout, which had been hampered by the FCC mod issues

3) Availability of Helix and Innos in quantity, at potentially lower MSRPs than Sirius' new line

4) Increase in market share (demand), per NPD data (as spurred by the marketing and new products)

5) Management exposure to Street - as the co completes its operational issues, they believe it will open up to the Street (particularly meeting new President & COO Nate Davis), further expounding on the positives of the XM story

6) Launching of Oprah (in September)

7) Raising (narrowing upward) guidance in October when the co reports, due to the
achievements above

8) Resolution of the recording rights & royalties issues

10) Further OEM penetration commitments (probably 1Q07)

Bear Stearns notes their new model is built conservatively, estimating: 16.5 mn subs by 2010 (vs. XM's expectation of high teens), declining OEM conversion rates, modest retail market share, higher churn rates, minimal ARPU growth, and lower SAC deceleration.

2007 target price of $17 is based on DCF valuation and supported by discounted EPS and FCF/Share analyses, as well as a Sirius EV/Sub comparative basis, all of which yield valuations in the $17-$18 range. Firm would expect a FCC approval to be followed shortly by manufacturing and shipment in volume in plenty of time for the big 4Q season. An improved marketing team coupled with the demand indicated by survey work, indicates a rebound in the 4Q for the company.

Notablecalls: As most of you already know that while I don't like highlighting upgrades/downgrades on this page, it's when I see something like this one, I usually end writing it up. Bear has been dead right on XMSR in the recent past and I think they may me right this time as well. You have a $11 (and change) stock here today that will be a close to $13 stock in the coming days. Prime example of an actionable upgrade.

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