SIRIUS XM Downgraded to Neutral

We downgrade our recommendation on SIRIUS XM Radio Inc. (SIRI - Analyst Report) to Neutral based on its high-level of current valuation and the recent debt crisis in the U.S., which may delay its economic recovery. SIRIUS XM reported mixed financial results for the second quarter of 2011. While EPS beat the Zacks Consensus Estimate driven by huge cost cutting, revenue fell below it.

In the previous quarter, SIRIUS XM performed poorly with respect to several operating metrics. Average revenue per user (ARPU) was $11.53 compared with $11.81 in the year-ago quarter. Average self-pay monthly churn rate was 1.9% compared with 1.8% in the prior-year quarter. Similarly, conversion rate was 45.2% compared with 46.7% in the prior-year quarter.

We remain concerned regarding the ongoing economic headwinds and its effect on satellite radio industry. The U.S., together with Europe, is at present suffering from serious debt crisis. Recently, Standard & Poor’s downgraded the century long coveted AAA sovereign rating of the U.S. to AA+.

A rising unemployment rate, slow GDP growth, and an expected government budget cut may result in lower disposable income on the hand of consumers to purchase satellite radio subscription. 

SIRIUS XM’s business depends to a large extent upon automakers. The sale and lease of vehicles with satellite radios is the most important source of subscribers for both the XM and SIRIUS satellite radio services. Any turmoil in the U.S. auto sector will have disastrous affect on SIRIUS XM’s businesses. 

Pandora Media Inc. (P - Snapshot Report) offers Internet radio services that can detect settings from iPhones or iPods, which can be transformed into convenient access to create customized music stations for individual users while driving. Pandora has 80 million registered users in the U.S. and provides a unique algorithm that increases the intrinsic quality of the music. In addition to iPhone, Pandora has also developed streaming services for BlackBerry and Android-based smartphones. Spotify.com Internet radio service also increased competitive pressure.

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