In a fairly unusual research note, Morgan Stanley analyst David Gober this morning launched coverage of Sirius XM (SIRI) with a designation of “Not Rated” and a target of $1, a penny below yesterday’s close.
“After completing the Sirius/ XM merger, a refinancing of its balance sheet, and weathering the recent recession, Sirius XM has emerged as a more stable company with several key opportunities,” he writes in the note. :”However, the company will likely continue to experience volatility in its share price as its ultimate free cash flow outlook becomes clearer. We are initiating coverage at Not Rated as we believe that equity values will remain highly volatile due to relatively high leverage and still relatively small free cash flow.”
Gober sees three opportunities for the satellite radio company:
- The company should continue to grow subscribers as U.S. car sales pick up with its service available in about 60% of new cars sold.
- Used cars: the company estimates that there are 7-8 million U.S. cars with satellite radios that are not paying for service. As cars are resold, Sirius can gain subs with relatively low acquisition costs.
- Mobile Internet-enabled devices could help SIRI’s growth.
But he also sees three risks for the company and the stock:
- Competition from mobile Internet devices. “Growing penetration of smart phones and increasing mobile broadband speeds have increased the availability of Internet radio services such as Pandora.”
- Maturation: The 3% drop in subs in the recession “may provide signs of maturation,” and he says that “SIRI must grow to expand equity value.”
- Leverage: The company has over $3 billion in debt and is levered at 4.5-5x.� “Modest sub losses could lead to negative free cash flow,” he warns.
SIRI this morning is unchanged at $1.01.
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