Stockings stuffed with sat radio?

Street sees an upside to struggling sector as holiday sales may be driver

With the gift-giving season just around the corner, some Wall Street analysts are suggesting that the time might finally have come to buy the woefully underperforming satellite radio stocks again.

XM Satellite Radio, which led The Hollywood Reporter's Showbiz 50 on Friday, and Sirius Satellite Radio are set to discuss full third-quarter financials and current business trends next week.

Some on the Street are expecting some upside to the stocks. Citigroup analyst Eileen Furukawa, for example, recently reiterated her "buy" recommendations on Sirius and XM, despite reining in her near-term subscriber targets for both companies.

"Even with lower subscriber targets, we believe satellite radio stocks are worth owning," she said.

The analyst and her team visited 25 Best Buy, Circuit City, Radio Shack and Wal-Mart stores in the New York and New Jersey area and discovered a "slow" sales environment for sat radio tuners.

She wasn't discouraged, though, because neither company has done much marketing early this month, and she found that consumer products on the whole have been selling slowly of late as well.

XM more recently launched a multiplatform marketing campaign, the first from its creative ad agency Lowe New York. Featured in two commercials are such artists as Johnny Cash, Snoop Dogg, A Flock of Seagulls, Regina Spektor, the Circle Jerks and Beethoven, with both ads ending with the line: "170 channels to find what turns you on. Are you on?"

The company also recently tweaked its marketing department, including the hiring of a chief marketing officer (HR 10/24).

As for Sirius vs. XM, the edge still goes to Sirius at retailers, as it has since the Howard Stern effect took hold, though that edge has narrowed, analysts say.

Furukawa said this is partially because Oprah Winfrey has joined the XM lineup. "The split between XM and Sirius continues to move back toward parity," she added.

The bottom line appears to be that, with Sirius shares off 42.5% to $3.85 this year and XM shares down 56.2% to $11.94, "depressed valuations more than account for the likely continued slowdown in retail growth," Furukawa said. "XM and Sirius remain more focused on reaching profitability at the sacrifice of sub growth, which is the right perspective in our view."

Furukawa, like other analysts, said that satellite radio sales at retail will become less important as sales by way of auto manufacturers become more of a factor. Acura recently struck the industry's first deal for bundling XM subscriptions into the price of used cars.

Credit Suisse analyst Bryan Kraft said he expects similar agreements will be forthcoming, an important development given that XM will save money because no equipment subsidies will be required, as is the case with new cars.

Furukawa has cut XM's year-end subscriber target from 8 million to 7.9 million, while taking Sirius down from 6.3 million to 6.2 million, but she sees healthy long-term growth. She predicts that by 2015 both services combined will boast 51 million subscribers, which boils down to 22% of the cars in the U.S. and 41% of households.

Still, some sat radio concerns continue to linger on Wall Street.

Banc of America Securities analyst Jonathan Jacoby recently said retail sales for the industry fell 12% year-over-year in September and warned that the slowdown could persist in the critical gift-giving-fueled fourth quarter.

"Our retail industry contacts tell us that demand from retailers is softer year-over-year as the fourth quarter gets under way," he said.

Analysts, even the bullish ones, often note that other things, not just slowing subscriber growth, could further derail Sirius and XM shares, even though they already are far from their 52-week highs.

For example, licensing agreements with the RIAA could be renewed at higher rates, observers said.