Shares in XM Satellite Radio tumbled May 24 after it announced it would not meet subscriber acquisition projections for the year, and while the stock recovered somewhat later in the week, some analysts suggested the company has a credibility problem.
The announcement was the latest in a string of bad news for the Washington-based satellite radio services provider. XM, already facing legal challenges to its latest handheld listening and recording devices, said May 22 that it was abandoning its planned $196 million acquisition of WCS Wireless due to regulatory hurdles. Two days later, XM Chief Executive Hugh Panero said the company now expects to have 8.5 million subscribers by the end of the year, rather than 9 million as previously predicted.
XM’s per-share stock price closed at $13.75 May 24 after opening at $15.40. It opened at $13.15 the following day but then recovered slightly to close at $14.35.
Overall, XM shares have lost some 50 percent of their value this year, which has been a tumultuous one for the company. In February, XM board member Pierce Roberts resigned in protest over what he said was runaway subscriber acquisition spending. In April, XM disclosed that it had received unspecified inquiries from U.S. regulators.
The company also faces a lawsuit from the recording industry over its handheld Inno listening and recording device, and a number of class action lawsuits from unhappy shareholders.
The reaction from analysts to the latest developments was mixed, with some downgrading the stock, at least one upgrading and others holding steady. But in notes to investors and in interviews, analysts indicated that XM has some work ahead to win back investor confidence.
“XM has turned into a bit of a ‘show me’ story,” Craig Moffett, an analyst with New York-based Bernstein & Co., said in an interview May 26. “They need to prove that they can competently run the business, having gotten the bad news out of the way about subscriber guidance.”
In his statement, Panero said XM still expects to attain positive cash flow by the fourth quarter of the year and attributed the revised subscriber acquisition guidance in part to a “softness at retail” for satellite radio in general.
But XM’s main competitor, Sirius Satellite Radio of New York, issued a statement of its own May 24 that appeared to dispute Panero’s characterization of the market. In its statement, Sirius reaffirmed its earlier projection that it will have 6.2 million subscribers by the end of the year.
PRIVATE tabstops:<*t(0.000,0,” “,211.500,0,” “,)> William Kidd, an analyst with Ladenburg Thalmann of New York, issued a note to investors May 25 saying the problem is with XM rather than the satellite radio market. “We believe the reality is that XM set unrealistic expectations from the start,” Kidd said.
One of the harsher analyst reactions came from Bob Peck of New York-based Bear Sterns, who downgraded XM’s stock after the company revised its subscriber projections. In a note to investors, Peck said, “we think management credibility has suffered a virtually irreparable blow during the past six-nine months, when the headlines have been negative for the most part, and investor expectations have soured.”
Peck’s note echoed Kidd’s sentiment that XM’s problems are not a reflection of the satellite radio market as a whole. “We underscore that we do not believe this is an industry phenomenon and in fact believe that we begin to see a decoupling of Sirius Radio from XM, as XM’s previous premium (confidence in management) has been eroded.”
The mood among analysts toward XM was not completely bearish, however.
In an interview, Shaun Parvez, an analyst with SG Cowen & Co. of New York, characterized the troubles surrounding XM as a “perfect storm” that likely will clear up in the coming months. He said he is urging investors to buy rather than sell stock in XM.
Moffett also sees the possibility of a rebound in the coming months, with a catalyst being the arrival of the Oprah Winfrey & Friends network on XM this September. But he cautioned that XM also needs to come up with a reliable portable listening device to regain its footing.
April Horace, an analyst with San Francisco-based Hoefer and Arnett Inc., said XM may be suffering from circumstances beyond its control, such as reduced consumer spending due to high gas prices. “I think we’re in a whole new market, so it’s very difficult to forecast consumer demand,” she said in an interview.
Chance Patterson, a spokesman for XM, could not be reached for comment. Reached by telephone May 25, Sirius spokeswoman Rebecca Schnall referred questions to Patrick Reilly, the company’s senior vice president for communications. Reilly did not return calls seeking comment.
PRIVATE tabstops:<*t(0.000,0,” “,211.500,0,” “,)> Comments: firstname.lastname@example.org