Street takes stock of satellite radio

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NEW YORK -- Satellite radio stocks fell about 10% each Tuesday -- the very same day Sirius Satellite Radio reported better-than-expected earnings -- and finished October as two of the few media tech stock decliners.

The explanation? Some observers suggested regulators may attempt to block the planned merger of Sirius with XM Satellite Radio because Sirius is looking good on its own.

But some on Wall Street argued such suggestions are nonsense. Credit Suisse analyst Bryan Kraft reiterated his "outperform" rating and $3.75 target price on Sirius shares.

"We continue to believe that Sirius and XM will receive approval for the merger," he said, adding that the theory of strong Sirius results undermining deal approval is "far-fetched."

Explained Kraft: "It's hard to imagine DOJ attorneys even noticing that Sirius beat consensus estimates for net adds, churn and (operating cash flow) loss."

Bank of America Equity Research analyst Jonathan Jacoby argued that "the Street remains solely focused on the merger."

In his much more bearish note, though, he argued: "The Street is more optimistic than our contacts. And the underlying long-term fundamentals appear to be weakening." Jacoby particularly highlighted that subscriber turnover at Sirius has been "artificially held down" as of late due to a strong growth push in the category of car buyer subscriber.

Overall, Jacoby has only a "neutral" rating on Sirius and $2.75 target price.

But others took more bullish stances on Sirius' performance and business momentum.

Utendahl Capital Partners analyst Alden Mahir lauded that Sirius' subscriber growth "handily" outpaced market expectations with third-quarter net additions of 525,000, well above a consensus of roughly 425,000, and the fourth consecutive quarter in which the firm outperformed XM.

Sirius management reiterated its guidance for more than 8 million yearend 2007 subscribers, "which, in our opinion, seems conservative," Mahir added. He cited that only 333,000 additions are needed in the fourth quarter for the firm to make its guidance, but it is traditionally the company's seasonally strongest quarter. As a result, Mahir raised his net additions estimate for the year's final quarter by 45,000 to 760,000.

Wedbush Morgan Securities analyst William Kidd similarly lauded Sirius for what he called "improving fundamentals across the board," including "considerably better than expected subscriber growth." Also, "Sirius' free-cash-flow story continues to outshine XM's," he argued, reiterating his "buy" rating and $4 price target.
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