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ING Barings Satellite Research Group
December 10, 1999
Sirius Satellite Radio
(OTC: CDRD-26)~
2X in 2K - We Think that CDRD Can Double in YR2000
STRONG BUY
This report is part of our upcoming "2X in 2K" report highlighting Sirius
Satellite Radio (CDRD), ViaSat (VSAT)
and Loral Space & Communications (LOR). We believe the share prices of all
three can double by year-end 2000.
ú We are pleased with the progress Sirius Satellite Radio has performed
since our March initiation.
Among other things, the company has completed its broadcast facility, signed
deals with program
providers and talent, and inked a deal with Ford to install the receive
devices in its new cars. We
believe even larger gains could be in store for Sirius investors over the
next year as our $50 Y/E 2000
price target indicates.
ú We Continue to Believe that the Market Opportunity for DARS Translates
into One Of The Most
Compelling Business Opportunities we have seen for any Telecommunications
Service. We expect
Sirius's primary target market to be the 200 million vehicles in the United
States. Market research
conducted by the Yankee Group suggests 42 million total digital audio radio
service (DARS)
subscribers by the fifth year of service. We have pegged our projections to
the actual growth of DBS,
which leads us to a total DARS market of 20 million subscribers in the same
year. Comparably, built
in CD players in cars reached nearly 21 million units in its fifth year. We
expect Sirius to command at
least 50% of the overall DARS market.
ú Sirius will have a competitive advantage over XM Satellite with elliptical
orbits, in our view.
Sirius Satellite's plan to use highly elliptical orbits should give the
company a competitive advantage
over XM Satellite Radio Holdings (OTC: XMSR-24 7/8) in terms of product
quality. This orbital change
should give the company substantially improved look angles over the
geostationary orbits intended by
XM. This would result in significantly fewer service drops when passing
obstructions such as tractor-trailers,
wet foliage and buildings.
Completion of Important Milestones Should Facilitate Stock Price
Appreciation in 2000 - We have listed
in chronological order a number of important catalysts below that we think
could accelerate price
appreciation throughout 2000.
1. Hiring of New CFO.
We believe the company will announce a new CFO within a few weeks. Sirius
has been without an official
CFO since Andrew Greenebaum left for an internet start-up venture. We
believe a strong hire will
effectively be able to communicate the Sirius story to Wall Street as well
as eliminate a concern of
investors.
2. Potential DaimlerChrysler Contract.
The company has negotiated an agreement with Ford Motor Company to install
Sirius Satellite Radio
receivers in its new cars. DaimlerChrysler, the only U.S. carmaker to not
yet sign such a deal, could do so
with Sirius at any time.
3. Announcement of Firm Launch Date.
We anticipate that Proton launches will resume in early next year and that
Sirius should be able to deploy
its first bird in March. The other launches could occur every few months.
The company's launch provider
could announce its expected launch schedule in January.
4. Approval of $225 Million Bank Facility - Sirius would be fully financed
through service
introduction.
We anticipate that the company could close on a bank debt facility that
should fund the system through the
expected introduction of service in late 2000 or early 2001. Removing
financing risk could be a large
catalyst as a project finance overhang would disappear.
5. Approval of Elliptical Orbits by FCC.
Sirius should receive FCC approval of its plan to deploy its satellites into
a highly elliptical orbit just before
its launch. Its license, won at an auction, contemplated the use of
geostationary satellites. However, to
achieve higher look angles, the company decided to use elliptical orbits.
Higher angles generally make
satellite signals easier to receive since those signals would be less likely
to be blocked by nearby objects,
buildings, trees, etc. We know of no opponents to Sirius' plans that
contested the approval.
6. Successful Launch and Test of Satellites - First launch could be in March
2000.
The Proton rocket selected by Sirius has a very good reliability record,
above 90% Sirius' Loral-built
satellites today have the best on-orbit record of any spacecraft. The
elliptical orbits will be flown using
software from Integral Systems. Many types of satellites have been flown in
similar configurations and we
do not believe this should be a major concern.
7. Other - Content providers and automobile manufacturers.
While we have no specific information in which automobile makers or content
providers could be next in
the cue to sign with Sirius, we anticipate that they will come. Automobile
manufacturers from Japan and
Europe have been looking at satellite radio and it is entirely possible that
one or more of them will select
Sirius. Also, the company has capacity for more programming. We believe that
the Sirius product is compelling
enough that it would enable the company to court some major content
producers to fill some of these channels.
More on the DARS Opportunity...
Small Penetration Could Yield Significant Returns
The cost of running a DARS system is minimal. For instance, programming
costs are roughly 6%
compared with 45-55% for DBS. Therefore, a DARS provider could have EBTIDA
margins well in excess
of 50% with only a few million subscribers. Sirius forecasts that it will
break-even at only 1 million
subscribers.
A Duopoly in the United States Should Enable Companies to Maintain Pricing
We believe the strong demand for the service and the lack of ready
competition to the two licensed DARS
providers in United States should enable the industry to maintain pricing
power. At $10 per month, we
believe the service is priced favorably to other forms of entertainment.
Financial Projections - $220 by 05?
Based on our assumptions, we project total revenues in 2005 of roughly $1.06
billion and resulting
EBITDA of approximately $682.3 million with EPS of $11.30 based on our
estimate of 40.3 million shares
outstanding on a fully diluted basis. Therefore, it is conceivable that this
stock will be a $220 stock within
five years, a CAGR of 53.3%.
Valuation Methodologies
Our 12-month target price of $50 was derived utilizing our standard DCF
method. We assumed a 20%
WACC and a 6.5% terminal value. However, if Sirius meets its milestones over
the next year we would be
inclined to lower our WACC thus dramatically increasing the target price.
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