We upgrade our recommendation on SIRIUS XM Radio Inc. (SIRI) to Neutral ahead of its first-quarter 2013 financial results, which will be released on Apr 30, before the opening bell.
Why the Upgrade?
We expect the company’s positive momentum with respect to revenue, margins and free cash flow to continue in the near-term. SIRIUS XM is largely dependent on the growth of the U.S. auto industry and currently holds an estimated 70% market share of the new cars sold in the face of growing competition from Pandora Media Inc. (P) and Spotify.
In order to retain its subscriber base, the company recently introduced an innovative personalized interactive Internet radio service called “MySXM”. SIRIUS XM currently has a Zacks Rank #3 (Hold).
Balanced View on SIRIUS XM
Continuous rise in auto sales led to a record subscriber growth for the company in 2012. However, management has hinted that auto sales may rise at a slower rate in 2013. According to the new deal with SIRIUS XM’s major customer, General Motors Co. (GM), the auto giant has stopped the payment of promotional money to the company. We believe that this may force SIRIUS XM to lose some paid promotional customers.
Further, SIRIUS XM lost the legal battle to counter the takeover bid from Liberty Media Corp. (LMCA), which currently controlsmore than 50% of the company. We do not know whether there will be any change in management policy after the takeover.
On the other hand, SIRIUS XM has a very strong business relationship with the original equipment manufacturers. The company owns an extensive satellite network, covering the whole of U.S. that provides audio contents through more than 170 channels.
In Jan 2012, SIRIUS XM raised the prices of its services. Management is hopeful that its churn rate will remain more or less the same as the previous year despite the hike in price. In the fourth quarter of 2012, average self-pay monthly churn rate was 1.8% compared with 1.9% in the prior-year quarter.
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