XM Satellite Radio (Nasdaq: XMSR)
Pete Sellis, Dan Raleigh, Erica Motta,
Josh Motta, Lee Bollinger. Will Wennerth
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.
Overall industry rating: Favorable Moderate Unfavorable
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
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
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
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
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.
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
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.
The threat of entry is extremely low and XM is
currently the larger between the only two (Sirius)
XM has a stronghold in the automotive
manufacturing sector as it is partnered up with GM
XM has all its building blocks in place and is just
waiting for business to take off.
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