XM Satellite Radio

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					XM Satellite Radio           (Nasdaq: XMSR)

      Communications Sector

            Pete Sellis, Dan Raleigh, Erica Motta,
           Josh Motta, Lee Bollinger. Will Wennerth
           Company Profile
   XM Satellite Radio Holdings Inc. (XM) is America's
    largest satellite radio service company, providing music,
    entertainment and information programming for
    reception by vehicle, home and portable radios
    nationwide and over the Internet for a monthly
    subscription fee to around 4 million subscribers.

   The channel lineup now includes more than 150
    channels, featuring over 65 commercial-free music
    channels; 30 news, talk and variety channels; 31 sports
    channels; 21 instant traffic and weather channels; one
    emergency alert channel, and premium channels
    available for an additional fee.

   XM Radio is available in over 120 new vehicle models,
    their biggest investor being General Motors.
                     Industry Analysis

Overall industry rating:         Favorable Moderate Unfavorable
                                   (yes)               (no)
Threat of new entrants.             +
Bargaining power of buyers.                   +
Threat of substitutes.                        +
Bargaining power of suppliers.      +
Intensity of rivalry among                               +
   To become a player in the satellite radio industry requires at
    least two satellites (at a cost of several hundred million dollars
    each), an FCC license, and hundreds of terrestrial repeaters to
    amplify the satellite’s signal in major urban areas.

   The satellite industry’s market includes over 200 million
    registered vehicles in the United States along with over 100
    million households in the United States. With one competitor
    and millions of customers, buyers have little bargaining power
    within the industry itself.

   However, XM encounters intense competition for both listeners
    and advertising revenues from many sources including Sirius
    Satellite Radio, traditional and digital AM/FM radio, Internet
    based audio providers, MP3 players, direct broadcast satellite
    television audio services, and cable systems that carry audio

   Moreover, the FCC has required both XM and Sirius to develop
    a common receiver platform for satellite radios enabling
    consumers to purchase one radio capable of receiving both
    services making switching costs extremely low.

150                                     Revenue ($Mil)

      2001   2002   2003   2004   TTM
   More channels: In the 2005 season, they added the Official Satellite Radio
    Network of Major League Baseball with a 24/7 MLB channel as well as play-by-
    play channels and Spanish-language broadcasts. This is in addition to their
    broadcasts of football and men’s and women’s basketball games from the Atlantic
    Coast, Pacific-10 and Big Ten Conferences. In 2004, they also added XM Public
    Radio which features award-winning radio broadcaster Bob Edwards.

   By internet: In the fall of 2004, a new online service was made where more than
    70 of the XM channels could be received over the Internet, including through
    Microsoft’s Windows Media Player 10 and Windows XP Media Center Edition

   In cars: XM is available in over 120 vehicle models, and growing. It is also
    installed in many Avis, Alamo, and National rental cars. XM has a 12 year
    contract with GM, so all their vehicles have XM installed in them and purposely
    places them in diverse price categories to attract all audiences.

   In airplanes: starting this year, XM Radio will be available on JetBlue and AirTran
    airplanes, which reaches to over 20 million passengers per year.
   XM has already spent the past few years investing in the infrastructure
    necessary to operate its business: satellites, ground repeaters, programming
    contracts, and digital radio receivers. Currently it is focusing on adding as
    many subscribers as possible through extensive marketing and strategic
    alliances like GM.

                       -40,000                                Gross Profit (000s)
                                 2000 2001 2002 2003 2004
Key Focus = Increasing Subscribers
      Broad distribution of XM Radio through the automobile market is a central
       element of their business strategy.

      The installment of XMSR in rental cars and airplanes.

      XMSR strives to include channels designed to appeal to different groups of
       listeners, including urban and rural listeners of different ages, and to specific
       groups that they believe are more likely to subscribe.

      They also plan to continue Launching new and improved products and
       selling them at more retail locations. i.e. Portable radio may compete with

     Unlike Sirius, XM has been wary of spending lots of cash for contracts (i.e.
      Howard Stern, 5yrs = 500 mil) with the exception of the MLB contract.
      Therefore, they hope to post higher earnings much quicker than Sirius.
XM Satellite Radio     TTM       2004    2003      2002        2001
Return on Equity        --        --       --      -69.6%     -32.7%

Return on Assets      -38.9%    -38.9%   -45.0%    -39.4%     -32.7%

Net Margin            -266.4%   -266.4% -659.1%   -2556.3%   -58025.0%

Average Asset          0.15      0.15     0.07      0.02       0.00
Financial Leverage      4.1       4.1     2.4       1.8         1.5
     Profitability Comps
XM vs. Sirius            XMSR (TTM)   SIRI (TTM)

Return on Equity             --         -63.3%

Return on Assets           -38.9%       -39.8%

Free Cash Flow $Mil         -255         -363

Net Margin                 -266.4%     -1065.3%

Average Asset Turnover      0.15         .04

Financial Leverage           4.1         1.6
                        Cash Flow
XMSR vs. SIRI      TTM           2004             2003       2002        2001

Cash from        -86    -334   -86    -334 -245     -284   -294 -321 -203 -149

Capital          -170   -29    -170   -29   -20      -20   -68   -42   -201   -81

Free Cash Flow   -255 -363 -255 -363 -265           -305   -363 -362 -404 -230
                   Financial Health
                           XM vs. Sirius

XMSR                    MRQ     2004    2003      2002     2001    2000

Debt to Equity          4.88    2.82       1.13      0     0.44    0.28

Current Ratio           1.75    1.95       2.61   0.63     2.43    4.16

Times Interest Earned   -8.67   -6.17   -4.30     -6.79   -14.68    NA
SIRI                     MRQ    2004    2003    2002    2001    2000

Debt to Equity            .77    0.66   0.15    1.18    0.79    0.64

Current Ratio            2.48    3.01   7.07    4.13    5.57    3.65

Times Interest Earned   -29.08 -16.11   -3.48   -2.98   -1.63   -3.01
                            Relative Valuation
    For companies in the early stages of their corporate lifecycles, traditional valuation
     ratios are often not particularly useful. XMSR and SIRI have yet to generate
     positive net income or free cash flow, and they both trade at what appear to be
     tremendous premiums to the market. Given XMSR’s larger customer base, sales,
     and gross profits, it seems that the company should warrant a higher valuation
     than SIRI. Despite this, however, the market is currently awarding Sirius a market
     cap almost $800 Million in excess of that of XM.

              MC        Sales    P/S     P/B    P/FCF*     P/GP     P/OI       P/E     P/E
                        (ttm)   (ttm)   (mrq)              (ttm)    (ttm)     (ttm)   (fwd)

    XM      $6.69B $304.0M      22.0    30.3     (22.7)    88.6     (14.9)   (11.1)   (17.6)

Sirius $7.48B $100.8M           74.2     8.8     (21.8)   (356.2)   (10.0)    (9.8)   (10.5)

         * 3 yr. avg.
                     DCF Valuation
Stock Price as of 5/22/05: $31.57
Analyst 12-Month Target Price Median: $40.00
Analyst 12-Month Target Price Mean: $41.00

   Given the complexity of modeling such a dynamic company,
    TBC Communications Group feels that a proprietary
    discounted cash flow model of XMSR would be of little to no
    value. In lieu of our own model, however, the findings of
    several professional stock analysts’ models are given, along
    with the critical assumptions employed. One should notice
    the tremendous variation in fair value (or target price) from
    model to model, demonstrating the difficulty of estimating the
    present value of this company’s future cash flows.
   Morningstar’s discounted cash flow model arrives at a fair-value
    estimate of $7, assuming a discount rate of 14% and sales
    growth of 68% over the next five years. They project that XMSR
    will generate operating margins of 10% by 2008.

   Standard and Poor’s’ discounted cash flow model arrives at a
    12-month price target of $35, assuming a discount rate of 12.5%
    and an “acceleration in free cash flow in 2007 and beyond.”
    They project that XMSR will break even by late 2006.

   Bear Sterns’ discounted cash flow model arrives at a 12-month
    price target of $39. They assume that XMSR will generate
    positive cash flow in 2007, and employ a discount rate of 11.5%.

   CIBC World Markets arrives at a 12-month price target of $55.
    They use a combination of NPV and DCR valuation, employing
    a discount rate of 10% and a assuming a P/FCF of 15x in 2014.
   Hugh Panero has been President and CEO since 1998, and has
    over 20 years experience in the entertainment industry. He has
    previously served as President and CEO of Request TV (a
    subsidiary of Liberty Media and Twentieth Century Fox) and also
    spent 10 years with Time Warner Company.

   He is an outspoken critic of Sirius CEO and former Viacom Chief
    Mel Karmazin, who previously questioned the viability of satellite
    radio – before accepting a lucrative job at Sirius.

   Perhaps emblematic of Panero’s overall management mindset,
    XM is headquartered in a century-old building in a somewhat
    shoddy neighborhood in Washington, D.C. Sirius, on the other
    hand, has a 15-year, $4.9 million lease on its swank headquarters
    in Rockefeller Center in midtown Manhattan.
   The top 16 Directors and Executives combined own less than 5% of
    XM’s shares. (The top 12 Directors and Executives of Sirius own
    2.2% of SIRI’s shares.)

   In 2004, options grants represented 2.3% of outstanding shares, with
    the top five officers recieving 45.6% of the options awarded.

   Morningstar notes that “warrant grants to strategic partners and
    debtholders have created substantially more dilution than employee
    stock options.”

   For the past three years (2002-04), XM has raised an average of $213
    Million per year through stock issuance. This compares to the
    company’s 2002-04 Net Income of -$495 Million, -$585 Million, and -
    $642 Million, respectively.
                  Bull Case
   The threat of entry is extremely low and XM is
    currently the larger between the only two (Sirius)
    market players.
   XM has a stronghold in the automotive
    manufacturing sector as it is partnered up with GM
    through 2012.
   XM has all its building blocks in place and is just
    waiting for business to take off.
                  Bear Case
   Skeptical financial health and profitability ratios.

   Satellite radio may be entirely replaced by new

   With little differentiation between the services
    offered by XM and Sirius acquiring subscribers
    may only become more and more expensive.
   Although satellite radio may be the next big
    thing there is a substantial amount of risk
    associated with investing. Therefore, at this
    point in time we recommend a VERY
    speculative buy.

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