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SIRIUS XM Radio in Neutral Zone

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We downgrade our recommendation on SIRIUS XM Radio Inc. (SIRI - Free Report) to Neutral based on its current valuation, which has soared nearly 70% in the last year. Meanwhile, the company continues with its strong performance primarily due to impressive management execution on the back of rising auto industry sales. Recently, SIRIUS XM declared that it achieved a record-high third quarter net subscribers’ addition. Total subscribers base at the end of the third-quarter 2012 was 23,365,383, up 9.5% year over year.

Despite price rise of its services, SIRIUS XM maintains its churn rate. Solid conversion rate and an effective marketing strategy helped the company to achieve this milestone. The company commands an estimated 70% market share of new cars sold in the U.S. in the face of growing competition from Pandora Media Inc. (P - Free Report) and Spotify. Beside its healthy subscription-based business, the company is slowly growing its advertising business. However, we believe all these positives are already reflected in the current valuation of the company.

Meanwhile, SIRIUS XM is currently fighting a hostile takeover bid from Liberty Media Corp. , its most powerful creditor. Liberty Media has filed a new application to the U.S. Federal Communications Commission, in which the company stated its intention to acquire more than 50% of SIRIUS XM, so that it can take full control of the Board of SIRIUS XM. Liberty Media withdrew its previous application with Federal Communications Commission (FCC) to de facto control SIRIUS XM. Instead, the company is now willing to get a full control. Liberty Media at present has 49.6% stake in SIRIUS XM’s total outstanding shares.

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