Morgan Stanley's downgrade of Sirius XM Radio (Nasdaq: SIRI ) this morning may not seem like too much of a diss.
Analyst Benjamin Swinburne is slashing his rating on the satellite radio giant from overweight to equal weight, while at the same time raising his price target from $2 to $2.30.
The past few weeks of healthy capital appreciation will work wonders in getting even skeptical analysts to bump up their price targets. There's even one pro -- Barrington Research's James Goss -- who elevated his 2012 price target to $3 earlier this month.
So what exactly is eating Swinburne? Well, he's fond of Sirius XM's business model and its growth outlook, but he finds himself on the low end when it comes to subscriber growth. Swinburne is looking for just 1.3 million net additions this year, a far cry from the 1.7 million net additions that got the service up to 21.9 million subscribers through 2011. Most analysts are eyeing 1.5 million or more.
Swinburne concedes that Sirius XM did come through with better-than-expected subscriber growth during the fourth quarter. He also singles out the improving sales outlook at General Motors (NYSE: GM ) and Ford (NYSE: F ) .
That's important. Ford and GM were early partners in the Sirius XM story. Since factory-installed receivers account for the vast majority of satellite radio subscribers, strength at Ford and GM has historically resulted in strong account growth at Sirius XM.
This doesn't mean Swinburne's caution is unwarranted. Sirius XM raised its rates this month. The increase wasn't much, but the 12% hike for new subscribers -- and old subscribers as they approach renewal milestones -- will weed out some penny-pinchers.
Sirius XM's own guidance should also raise some eyebrows. The media giant hasn't gone public with its 2012 subscriber target, but back in September Sirius XM was projecting $3.3 billion in revenue for 2012. That's a mere 10% increase over its 2011 top-line target and closer to a 5% spurt based on its fourth-quarter run rate (which matters because the 12% price hike went into effect at the start of this year). Obviously, there will be a lot of people who won't be hit or can negotiate their way out of this month's increase. Until Sirius XM puts out a public subscriber target -- something that may happen when it reports early next month -- Swinburne and his peers will simply have to agree to disagree.
I don't question Swinburne's skepticism on subscriber growth for 2012. Conversion rates have been shrinking in recent quarters, and new cars will be less of a factor with every passing year as more buyers are either existing subscribers swapping one sub for another or folks who tried the service and chose to pass on paying a premium for an upgrade in in-car audio entertainment.
However, Sirius XM doesn't need to grow its subscribers at a heady clip to deliver strong bottom-line results. Between this month's price hike and the fact that programming and content costs have actually declined over the past year, even a modest gain in subscribers will be huge in terms of profitability and free cash flow.
Sirius XM's fundamentals continue to improve. The share price will follow.
In the spirit of the CAPScall initiative for accountability, I'm reiterating my bullish call on Sirius XM for Motley Fool CAPS. XM Satellite Radio was a Rule Breakers recommendation before the Sirius XM merger. It's gone from the scorecard, but if you want to discover the newsletter service's next Rule-Breaking multibagger, a free report tells all.
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