Investors Tune Out XM

The past few months have featured a comedy of errors for Motley Fool Rule Breakers pick XM Satellite Radio (Nasdaq: XMSR  ) . This morning, you can add bungled guidance to a list that includes an FTC investigation, an insider-sell-off, a high-profile board-member resignation, and a big mouth.

XM now says that it expects to end 2006 with 8.5 million subscribers, down from its previous forecast of 9 million. The stock was down 11% yesterday and has fallen another 6% as I write today.

But is poor guidance really so bad? In this case, yes. Foolish friend Rick Munarriz said it best in a note to me yesterday, in which he described the revision as "inevitable." Rival Sirius (Nasdaq: SIRI  ) , you see, has beaten XM in subscriber growth for the past two quarters. The implication was that XM would outperform Sirius in net additions for the last nine months of the year -- unless, of course, the company was being overly optimistic with its projections. Turns out it was.

That's one of the reasons why I'm feeling as bearish as the other investors selling XM today. After all, guidance is Wall Street 101. But I'm even more disappointed in CEO Hugh Panero's explanation for the shortfall. Listen to this:

Although XM has regained retail market share since the first of the year, the satellite radio category has seen an overall softness at retail during the second quarter to date ...

So retail is good, but not that good? Uh, OK. For what it's worth, Sirius disputed this claim yesterday, saying that it is experiencing dramatic growth in all areas of its business.

The most important question, of course, is whether XM will be able to keep its promise to earn positive cash flow from operations by the end of the year and throughout 2007. So far, management says yes. You'll have to pardon me if I'm skeptical. With subscriber acquisition costs rising steadily, XM hardly has a reputation for being economical. But it will need to rein in costs if it wants to generate cash anytime soon. After all, as of today, XM's growth is no longer as certain as it once was.

Tune in to related Foolishness:

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Fool contributorTim Beyershas tried both XM and Sirius over the Web; he likes them equally, but not enough to buy. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out which stocks he owns by checking Tim's Foolprofile. The Motley Fool has an ironcladdisclosure policy.

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