XM Finds New Wavelength

Wall Street's hoping a recent selloff clears the way for a rally.
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XM Satellite Radio

(XMSR)

warned in October that the fourth quarter would be tough. Now that the stock has fallen 20%, investors are hoping the bar is low enough for a quick rebound.

Much of the bad stuff that materialized in XM's December quarter has been handily anticipated on Wall Street. Weak sales at

GM

(GM) - Get Report

cut into car- radio subscriber growth, and supply delays hurt Christmas sales. Meanwhile, Howard Stern's then-pending debut at rival

Sirius

(SIRI) - Get Report

stole the spotlight, and through it all Washington-based XM's massive costs didn't magically come down.

With the company's earnings report due Thursday morning, investors are braced for some bad numbers. XM's net loss is likely to amount to almost a buck a share, surpassing the 60-cent-a share loss in the third quarter. The much-watched performance figure -- costs per gross subscriber addition -- is expected to balloon as high as $120 from the $104 in the prior quarter.

But satellite radio investors don't always let costs distort the bigger growth story. XM's deal with Oprah Winfrey last week and Sirius' signing of Stern and Martha Stewart last year have helped push pay radio toward the coveted mass-market media status.

And as the bulls point out, there's a fairly predictable increase in users coming from the auto market, where Sirius and XM radios are gaining installations on new cars.

Looking beyond recent retail-radio price wars, the so-called Stern effect -- and the increasing defections, or churn, as fewer users commit to service beyond the free promotional period -- some analysts see reason for hope.

"Though we believe these challenges could create volatility in 2006, the outlook for 2007 is extremely robust due to the expected ramp" in XM's auto partners, Morgan Joseph analyst Dave Kestenbaum wrote last week.

"We believe the company's

auto partners will install 3 million or more radios in 2007, and up to 5 million radios in 2008," says Kestenbaum, who has a buy rating on the stock.

Media-savvy management at Sirius seems to have anticipated an

opportunity to shine after XM delivers its dim report. Wall Street speculation suggested that Sirius chief Mel Karmazin wouldn't commit to an earnings release date until after XM picked one.

As it turned out, Sirius committed to a Friday earnings appointment less than four hours after XM announced the timing of its own release.

Investors expect XM to post a net loss of 92 cents a share on sales of $174 million in the fourth quarter. And analysts' consensus estimates for Sirius call for a net loss of 22 cents a share on $75.4 million in revenue.

XM shares were up 20 cents to $24.84, and Sirius was up 13 cents to $5.77 in midday trading Wednesday.