Slow customer gains causing static


NEW YORK -- At the start of the fourth quarter of an already tough year for them, satellite radio stocks picked up some more static last week with updates on their third-quarter subscriber gains.

XM Satellite Radio added more than 285,000 net new subscribers in the period, bringing its total user base to over 7.2 million.

Oppenheimer & Co. analyst Thomas Eagan pointed out that this was the company's "lowest level (of customer growth) in 10 quarters." Similarly, Bear Stearns analyst Robert Peck said this growth pace was "marginally lower" than his estimate of 325,000 subscriber additions.

Merrill Lynch analyst Laraine Mancini used the news update to reduce her forecast for fourth-quarter user additions, arguing that "XM continues to be impacted by retail channel weakness and production cuts" at the Big Three carmakers with which XM has deals.

She now projects net subscriber additions of just 1.74 million for XM this year, which would make the firm end the year at 7.67 million. Previously, Mancini had predicted 1.79 million additions and a 7.72 million year-end tally.

Eagan issued a report titled "Another Shoe to Drop?" implying he is "concerned that XM will not reach its guidance of reaching break-even on net cash from operations" in the fourth quarter. A pullback of this guidance would hurt the stock incrementally, he argued.

However, Eagan reiterated his "buy" rating on the stock "because we see it, at this price, as a value play on long-term favorable consumer demand for satellite radio."

Still, he echoed several colleagues in saying that he prefers shares of competitor Sirius Satellite Radio at this stage "due to the company's more strategic approach to the business."

Sirius added over 441,000 subscribers in the third quarter to end it with more than 5.1 million users.

"Sirius continues to have retail market share edge over XM" with an estimated 53% estimated retail share of gross adds in the latest quarter, Citigroup analyst Eileen Furukawa said. "This translates to an estimated 70% net add share."

While most analysts said Sirius' gains in the period were in line with or ahead of their estimates, Mancini said Sirius came in "modestly below our 457,000 estimate."

Furukawa also cited an overall "soft retail market" but said users added through car partners "should allow Sirius to hit its 2006 subscriber target."

Either way, XM and Sirius finished the week close to their 52-week lows of $9.63 and $3.60, respectively.