SIRIUS XM Downgraded to Neutral


We downgrade our recommendation on SIRIUS XM Radio Inc. (SIRI) to Neutral based on its current valuation, which soared nearly 80% in the last year. We believe this high level of valuation may restrict above market gain anytime soon.

Fourth quarter -2011 financial results were mostly in line with the Zacks Consensus Estimates. During 2011, the company achieved several operating milestones, including significant net subscriber addition, record-high adjusted EBITDA and free cash flow generation, growing penetration in the auto sector.

Management predicted that this positive momentum will further intensify in 2012 and accordingly projected a healthy financial outlook. We believe introduction of Satellite Radio 2.0 and recent price increase will boost the company’s financials going forward.

Despite higher programming cost and stiff competition from several media players, such as Pandora Media Inc. (P) and Cumulus Media Inc. (CMLS) we believe that the company will perform well mainly due to increased programming lineups and improved ratings.  

In December 2011, SIRIUS XM launched SIRIUS XM 2.0 product suite in the retail channel. SIRIUS XM 2.0 will include WiFi, Bluetooth, Internet, and will expand its existing bandwidth by 25%. It will also include features such as time shifting, replay, pause, rewind, and will be software upgradeable.

SIRIUS XM 2.0 will enhance the audio content line up of the company with new channels. The company has also launched few Mexican and Latin channels that include Spanish news channels and also provides Spanish-language sports commentary, hence catering to the different needs of the society.

Recently, the company has launched an upgradeable version of SIRIUS XM 2.0 called “Lynx” a next generation satellite receiver that allows the subscribers to stream content to home audio systems via Bluetooth. It will also provide high-resolution touch screen support and allows 200 hours of music storage.

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