Tune into Satellite Radio

10/14/2005 12:00 am EST


Jamie Dlugosch

Editor, The Rational Investor

"I am a huge fan of satellite radio," says Jamie Dlugosch, who holds both Sirius Satellite and XM Satellite in his model portfolio. Here, the value and growth investor takes a look at the short- and long-term prospects for the industry and its leading players.

"Both Sirius Satellite Radio (SIRI NASDAQ) and XM Satellite Radio (XMSR NASDAQ) have been in the news lately with very positive developments. Unfortunately, the good news appears to have gone unnoticed as investors have been distracted by other mounting worries. Recent natural disasters and concerns regarding the health of the economy weigh heavily. As a result, quality stories are not receiving nearly the same amount of exposure that would occur in a more positive environment.

"Such a state provides opportunity for ‘Rational Investors.’ Recently, shares of SIRI have declined by 11%, in response to raising its full year revenue guidance. Say what? The company stated that revenues would now be $230 million, up from $225 million. The firm reiterated that it would hit the three million mark in subscribers and that it would be cash-flow positive in 2007, starting in the fourth quarter of 2006. News from competitor XMSR has been equally positive. Its subscription growth is exceeding expectations and demonstrates the mass appeal of satellite radio.

"Investors have been concerned that digital radio would be a competitive concern for the satellite industry down the road. I disagree. The reason satellite radio works is due to content. Yes, clarity and quality make a difference, but the real reason consumers are willing to pay monthly fees is for the specialized, self-directed content. I do expect free radio to exploit new digital technology, but at the end of the day they will still come up short competing against satellite. Free and independent choice will drive this segment to become the dominant selection in the radio industry."

"I would not be surprised at all to see SIRI hits its previous high before the end of the year. There are many catalysts for future appreciation, including the launch of Howard Stern and the possibility that subscription growth beats expectations. Any strength in the market during the fourth quarter would translate into exponential gains in the satellite sector. Overall, the industry is still in its infancy, yet has a proven product with the potential to serve a massive market. What's more exciting is the potential we now see in the short run as significant gains may be had prior to the end of the year. If you have yet to buy shares in SIRI or XMSR, use the current weakness to do so now. My buy limits are $10 for SIRI and $40 for XMSR."

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