Sirius Reservations

On the analyst front, the news on Sirius could turn disappointing as well. On average, approximately nine analysts cover each stock in the communications industry vs. 33 analysts for Sirius, according to Thomson First Call. However, we found only one firm with a sell rating on Sirius. This is surprising, especially considering the stock lost 50% of its value in just eight months and is trading at its 52-week low. And if the company fails to meet year-end subscriber estimates, this may open up the door for some downgrades.

One wild card, however, would play in Sirius' favor. Last year, rumors of a possible merger between Sirius and XM surfaced but were quickly squashed by both chief executives, Mel Karmazin at Sirius and Hugh Panero at XM. Even if the two CEOs were in agreement, regulatory issues would have also been a factor, as these companies were the two largest players in the field. But now that Apple has entered the mix, we believe a merger between the pair makes sense. The synergies of the combined company would save money in the long run, which has been a major problem for both Sirius and XM.

However, other than the possibility of a merger, we see no fundamental reason to own Sirius shares. Even at the current price, the risk/reward is high, based on the competitive threats confronting the company, Sirius' higher expenses than its rivals, and the fact that the company will not see profits most likely until at least 2009. Unless Sirius can somehow beat its 2006 subscriber estimate of 6.3 million subscribers, we believe shares could fall below $3 going into 2007.

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