Satellite Radio Playground

By Demian Russian

Last Wednesday, in a quick response to news of Howard Stern’s production company One Twelve Inc. and Stern’s agent Don Buchwald filing a lawsuit against Sirius XM Radio (NASDAQ:SIRI) with the Supreme Court of the State of New York, Wunderlich Securities media analyst Matthew Harrigan downgraded Sirius XM from a BUY to a HOLD rating and lowered his price target on the equity from $2.00 to $1.65. In his March 23rd report, Harrigan noted that Sirius XM’s current stock valuation “likely cannot accommodate the uncertainty engendered by the suit — even if it ends up being meritless.” Following his March 23rd report, Harrigan has issued a new updated SIRI report reiterating his Hold rating and $1.65 price target.

We continue to believe that investors should focus on long-term normalization of U.S. vehicle sales and conversion rates rather than the Howard Stern litigation or auto sales aberrations off Japanese output and parts supply chain noise. However, these elements can still have a subjective trading influence that limits the short-term valuation premium.

– Matthew Harrigan, Wunderlich Securities

In his latest report, Harrigan explains that while lowering his price target from $2.00 to $1.65 explicitly cut $2.2 billion in target enterprise value, which he notes is beyond what anyone views as the lawsuit’s likely fallout, he views the lawsuit as “a tipping point that layers on to uncertainty relative to the consumer and more visible in-vehicle competition.” Harrigan also added that the Stern lawsuit had reduced his level of comfort in assuming a post-2015 growth rate of 3%, noting that most media stock targets or actual trading levels were currently implying only 0%-1% longer-term growth. 

While Harrigan views some overhang from the lack of details and resulting uncertainty surrounding the Stern lawsuit, he noted that what matters most for Sirius XM in the longer-term is a sustainable U.S. auto sales SAAR and conversion rates, as opposed to “transient near-term moves.” While Harrigan does see annual U.S. auto sales recovering to an annual 15 million unit level by 2015, he also sees Sirius XM’s conversion rate falling to the 40% area in tandem, reflecting share erosion from Apple (NASDAQ:AAPL) iPod docks/increasing cross-device iTunes access and growing OEM dashboard support for internet radio providers. While Harrigan also sees the potential for global auto sales production being affected by the tragedy in Japan, he notes that this “intermittent noise” should not impact longer-term valuation.

Matthew Harrigan’s Track Record on Sirius XM

1/27/10 – Initiates coverage of Sirius XM Radio for Wunderlich Securities with a BUY rating and a $1.00 price target. (SIRI $0.7076)

3/01/10 — Downgrades from BUY to HOLD, maintains $1.00 price target. (SIRI $1.02)

5/03/10 — Reiterates HOLD rating, raises price target to $1.25. (SIRI $1.1775)

8/05/10 — Upgrades to BUY rating, raises price target to $1.50. (SIRI $1.06)

11/03/10 — Reiterates BUY rating, raises price target to $1.75. (SIRI $1.569)

2/14/11 — Reiterates BUY rating, raises price target to $2.00. (SIRI $1.84)

3/23/11 — Downgrades to HOLD, moves price target to $1.65. (SIRI $1.705)

(The historical SIRI stock quotes listed above are the closing prices as of the prior trading day according to Nasdaq official records.)

Wunderlich Securities media analyst Matthew Harrigan will be weighing in on Howard Stern vs. Sirius XM during an exclusive, live interview with Playground Radio this Wednesday, March 30th, 2011 at 8:00PM ET.

Matthew Harrigan has fourteen years experience as an equity and high yield media analyst, focusing on both U.S. and international companies. He has been recognized multiple times on the Wall Street Journal Best on the Street compilation and was also an Institutional Investor ranked analyst for both Latin American media and for boutique coverage. Prior to joining Wunderlich Securities, Inc., Harrigan was a Senior Vice President at Ferris, Baker Watts and a Managing Director at Janco Partners. He was previously a Vice President at JP Morgan Securities and at Bear Stearns. Harrigan graduated with Distinction from The Wharton School with a concentration in International Finance and magna cum laude from Brown University where he was a Rhodes Scholarship Candidate. He worked in the International Capital Markets and Swap Derivatives areas at Salomon Brothers prior to attending graduate School at Wharton and at Stanford Law School.

Matthew Harrigan will be interviewed by Satellite Radio Playground’s Demian Russian and Brian Newman Rayl. Previous episodes of Playground Radio, including previous interviews with Matthew Harrigan, are available to be streamed or downloaded as an Mp3 or via iTunes. More information, including an updated Playground Radio schedule, can be found at the Playground Radio Home Page. Wednesday’s Playground Radio interview will be available to be streamed live via the following link.