Daily Archives: January 22, 2007

IPO Pricing: AeroVironment

AeroVironment Inc.(AVAV-NASDAQ) has priced its IPO.  This was one that we thought was supposed to price later in the week, but the demand was there for a premium pricing or the late-week indication was not accurate.  We had been given a Wednesday to Thursday IPO trade date indication last week; but the Cramer push on CNBC’s Mad Money from last friday might have bumped the terms a bit more.

AeroVironment is a maker of small unmanned backpack-sized recon-aircraft used by the military, although it does derive some corporate revenues; more can be found on the company homepage.  The deal priced 6.7 million shares at $17.00 per share, above the $14.00 to $16.00 range.  The underwriters have the option to purchase an additional 1 million shares to cover overallotments and it will have slightly north of a $350 million market cap for the offering price.

As noted, Goldman Sachs is the lead underwriter; co-managers are listed as Friedman Billings Ramsay, Jefferies, Raymond James, Thomas Weisel, and Stifel Nicolaus.  The company had revenues of $139 million and profit of approximately $11 million in 2006. This was expected to get a slight bump at pricing, but Cramer got on this one last Friday and now many more inquiries have been made and the opening price could easily be above $19.00 or $20.00.  We’ll have to see how the market is on Tuesday before hanging any finite opening price out there.

If you wish to subscribe to our free email list that gives more detailed information on select IPO’s, backdoor plays, special situation investments, and BAIT SHOP updates on buyout candidates please send an email to jonogg@247wallst.com and title it SUBSCRIBE.  We value privacy and do not share our email lists with any third parties. 

Jon C. Ogg
January 22, 2007

Posted on: January 22, 2007 – 11:15 pm in Cramer, Defense, IPOs

Cramer Refutes the Sell Rating on Ceradyne (CRDN)

Cramer interviewed Joel Moskowitz, CEO of Ceradyne (CRDN), to end MAD MONEY on CNBC tonight.  Cramer said that the recent SELL rating from FBR on concerns of a potential demand cut from body armor causing a $9 drop recently is not right and they shouldn’t be scared.  The CEO said they have more 2007 body armor orders than they have ever had.  He said the US in 2007 and 2008 are indicating that they want to maintain high body armor levels in what may be for all field personnel, but that is from discussions rather than firm orders.  They have an 80,000 square foot facility they opened for the armor for trucks and they have $250 million in quotes that are pending on the table.  Cramer said that he is going with the bull case and he thinks the FBR research call for a Sell on the stock is Wrong.

Jon C. Ogg
January 22, 2007

Posted on: January 22, 2007 – 6:59 pm in After-Hours Activity, Analyst Calls, Cramer, Defense

Cramer Says Capital One’s Miss Wasn’t the Issue: It’s In His Wallet

Cramer also asked tonight on MAD MONEY on CNBC about Capital One (COF) and how its numbers weren’t great nor was guidance, but the stock climbed big.  He said the newswires panned it and the company lowered fiscal guidance.  The delinquencies were actually better, and that is what the street focused on.  The shorts were betting heavily on the delinquencies rising, and they had to do a rapid short covering after the metrics came in better than expected.  With a believable earnings base the earnings multiple is dirt cheap if you can trust the quality of its earnings.  He said that this is why the shares are up $3.00 since earnings.  The stock is up 1% at $79.80 in after-hours and he thinks this can go up to $100.00.

Jon C. Ogg
January 22, 2007

Posted on: January 22, 2007 – 6:49 pm in Banking, Cramer, Financial Stocks

Cramer Calls a Bottom in Oil Service Stocks (SLB, OIH)

Main Stock Tickers: OIH, SLB

Cramer also said on tonight’s MAD MONEY that oil service stocks have made the turn for the better.  By reviewing Oil Service HOLDRS (OIH) you can see the sector bottomed.  It got killed as oil prices were sliding, but by last Thursday the stocks were basing and recovered even with oil prices lower.  He says if you listened to Schlumerger (SLB) on the conference call you’ll undertsand.  SLB hiked its dividend 40% and then the company blew away the bears.  Its shares rose while $49 oil prints were coming on oil trading.  SLB even said the new phase of exploration has only just begun.  He thinks they are the most conservative oil service stock out there.  Cramer said the bears were turned after SLB said that short term declines in commodities will mean that delays in orders and services will only be short lived; the period of cheap oil and gas have ended and investments will be up in the sector; they will continue to see consistent high growth for the decade and into next decade.  Needless to say, Cramer was very positive on Schlumberger (SLB) and the oil services sector.  SLB traded up 1.1% to $61.71 in after-hours after Cramer’s tout on it, and even the OIH shares indicated up 0.4% at $132.77 in after-hours.

Other key oil and gas service stocks he did Not note that are in thesector: HAL, BHI, WFT, NOV, SII, BJS, CAM, PGS, GRP, FTI, PDS, OII,SPN, DRQ, OIS, LSS, DVR

Jon C. Ogg
January 22, 2007

Posted on: January 22, 2007 – 6:29 pm in Cramer, Oil & Gas

Cramer’s 4th Favorite International Stock Pick (RIO)

On tonight’s MAD MONEY on CNBC Cramer discussed listening about how so many investors don’t want to be 100% invested in America.  Even though America is 100% pro-corporations, Cramer said he has increased his foreign exposure tolerance to up to 20% from 10%.  He has tonight the BEST 4 FOREIGN stocks.  This will get you in emerging markets and away from the Fed and rates.

Cramer first reviewed in Brazil as his 4th best international pick: He likes CVRD-Companhia Vale do Rio Doce (RIO) which he likes better than Rio Tinto (RTP).  He likes that it bought Inco in a robbed deal.  It used to be a provincial iron ore company but is now diversified and global, and is thought of as a lowest cost producer that is essentially a Canadian-Latin player and has huge reserves.  He thinks the stock is dirt cheap and the investment expectations are too low for the forward year.  Now that Brazil is cutting corporate taxes, he likes it even better.  The country is also allowing the stripping of the rain forest to stabilize the country and make it energy self-sufficient, and he reminds you the show is about money more than social issues.

As a reminder, Cramer has picked this one before and please note the $74 Billion market cap.  RIO closed up 1.6% at $30.62 in normal trading and shares rose 1.5% to $31.10 in after-hours trading.

Jon C. Ogg
January 22, 2007

Posted on: January 22, 2007 – 6:14 pm in Cramer

TI, It’s OK

The fourth quarter results for Texas Instruments (TXN) were just fine. Revenue was up 4% compared to the same quarter last year, hitting $3.46 billion. Wall St. may concentrate on the drop from Q3, but that would be a mistake.

The most critical number in the announcement was TI’s gross margin of 50.5%. The number could have been much worse given the pressures that customers like Motorola (MOT) and Nokia (NOK) are experiencing.

Revenue in the first quarter of 2007 is expected to be $3.01 billion to $3.28 billion. Not great, but hardly a bloody mess.

A little TXN rally tomorrow. Probably.

No harm. No foul.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Posted on: January 22, 2007 – 4:46 pm in Semiconductor

Pressler Got the Gap Memo, He’s Out!

The headline is all that matters: Gap Inc. Announces Paul Pressler to Step Down as Chief Executive Officer

Robert J. Fisher, the company’s current non-executive chairman of the board of directors, will also serve as president and chief executive officer on an interim basis, effective immediately.  A search will commence for a new CEO but honestly they could replace Pressler with a rodent and Wall Street would have been satisfied.

Paul Pressler was one of the 10 CEO’s that need to go, although not all of the CEO’s were actually being called to be put in front of the firing squad.  Be sure to read the list because it isn’t an outright call for all of them to be canned.  Pressler was one of the ones that really needed to go and needed to go in short order.  We noted that Nardelli needed to leave Home Depot even if it meant that he would get a huge pay package to leave early.  The same goes for Pressler, he’s a liability in a retail and clothing company.

The company recently made some key changes in the Gap and Old Navy units, but they didn’t go far enough and they probably just made the company more hollow.  If they would have gotten rid of Pressler it would have at least been possible to make the company more attractive.

He got the memo. "Dear Sir, Don’t let the door hit your assets on the way out!"

Jon C. Ogg
January 22, 2007

Posted on: January 22, 2007 – 4:40 pm in Analyst Calls, Compensation, Management Change, Retail, Shareholder Issues

Cramer Still Out on Citigroup and Wants Texas Instruments To Get Bad News Out of the Way

On today’s STOP TRADING segment on CNBC: Cramer said on Citigroup (C-NYSE) that Chuck Prince leaving would be worth $5 and a break-up worth $2 per share.  Cramer said Prince leaving could convince him to buy the stock but that’s it.  He wants a banker running it instead of a lawyer.

Texas Instruments (TXN) needs to go ahead and get the bad news out of the way and then we can get a brief rally in tech.

Cramer said Kimberly-Clark (KMB) will benefit from lower energy prices more than the street thinks since he said the forward guidance was based on above $70 oil prices.

Cummins (CMI) should be down more than it is after Eaton (ETN).

He didn’t make any comments on that 17,000 level he threw out in a video on TheStreet.com som that prior statement must have just been some very long-term conjecture.

Jon C. Ogg
January 22, 2007

Posted on: January 22, 2007 – 2:52 pm in Cramer

American Express Met Estimates, Sort Of

American Express (AXP-NYSE) issued earnings mid-day today with $0.76 EPS and revenues of $7.2 Billion;
Estimates were $0.76 and $7.3 Billion.  There was a divergence on First Call estimates versus the Reuters estimates, so depending on how you look at it AXP met estimates or missed by a penny on Earnings Per Share and revenues were a tad under the mark.  But you have to consider the company and how it reports.

As you would guess, AXP shares whipped around by going positive for a second and then back into negative territory.  This is close enough that you would probably think that the analysts were unsure of the exact numbers because of differences in credit charge-offs and differences in analysts factoring out past businesses no longer inside the company.  Shares are currently down $0.35% at $57.87.  Its 52-week trading range is $49.73 to $62.50.

This name often gets whips in its stock after reporting earnings, but now that they have jettisoned the Ameriprise (AMP-NYSE) unit the stock is viewed as more of a standalone company.  You do have Mastercard (MA-NYSE) that can be affected and soon you’ll have Visa as its own operating public company, but American Express just doesn’t usually spill over into banking and lending institutions.  The street may ultimately say this was a net miss but it really feel in line on an acceptable range if you look at how the stock usually reacts to earnings.

Jon C. Ogg
January 22, 2007

Posted on: January 22, 2007 – 2:25 pm in Financial Stocks

Did Cramer Call for 17,000 on the DJIA?

Cramer noted his rate-cut stance a tad differently today by being a tad lighter on the timing and urgency by saying the Fed won’t cut until they see year over year declines in commodity prices.  He thinks they are more inclined to cut, although cramer’s DJIA 17,000 target is based on a slow-down and weakening mid-year followed by Fed Cuts and then a huge rally.  Did I hear that right? 17,000?  He noted 14,582 as the 2007-end level on the DJIA back on January 3…

He says tech is still too hard to own through the valley and smart money is bolting on strength.  He notes some individual names today like Eaton (ETN) and Kimberly Clark (KMB), he’s still down on tech; but that 17,000 might turn some heads and tickle some ears.

Here is the link to his video from this morning off of TheStreet.com.  I went back over that to verify the "17,000" and that sure sounds like what he said.  Obviously his 17,000 isn’t replacing the original call from over two weeks ago, but that may be part of a bigger long-term call.  We’ll see if he clarifies this later today or during the week.

Jon C. Ogg
January 22, 2007

Posted on: January 22, 2007 – 1:02 pm in Cramer, Economy, Technology Companies, WiMAX

Boeing Shares React to Research Note Over News

Sometimes a broker research note can be more powerful than news, even if the call is on valuations and mentioning what could be an inevitable slow-down in new orders after what has been a robust 3-year expansionary phase.  Boeing (BA) was downgraded by Wachovia to a Market Perform rating from an Outperform rating. Typically such research notes would be said to contain little information of value, but this report could mark the end of a trend and could put the other analysts on watch for more downgrades (this is actually the second such call from key research reports).  You can probably expect several firms to try defending the shares today, but our ‘at-risk’ vantage is on a longer-term view in this case.   StarMine doesn’t even have Wachovia listed as one of the top analysts in the stock. 

The fact that General Electric has sent it a $5.3 Billion order for 39 planes has hardly been noticed, which means that investors are still acting more cautious than brave.  It would be prudent to think that street may want to see an adjustment to high-multiples before making any changes to forward valuations.

BA shares are down 3.25% at $85.75, still toward the higher-end of the $65.90 to $92.05 trading band over the last 52-weeks.  Keep in mind that the stock ended September 2001 at $30.57 on a dividend adjusted basis, so the DJIA component has run roughly 200% over the last business cycle from trough to peak.  Analysts still have a positive bias to the stock, so you could easily see more downgrades with the stock so much higher.

Jon C. Ogg
January 22, 2007

Posted on: January 22, 2007 – 12:00 pm in Analyst Calls, Large Cap Stocks

Wall St. Falls Out Of Love With Apple (AAPL)

Well, all the news is out. The great earnings. The 21 million iPods sold last quarter. The iPhone introduction.

What does Apple have to show. A stock that have fallen from $97.80 (more after hours) to $85.75 since earnings were announced. That’s a drop of over 12% in just a few days.

There is no real new news on the Steve Jobs options mess.No other special news.

No, the news is out, and, net net, Wall St. doesn’t think the next quarter or so look too good for Apple. The phone is not out until mid-year, and the risk is that the next two quarter may be mediocre.

Down she goes.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Posted on: January 22, 2007 – 11:35 am in Consumer Electronics

IPO Alert: VeriChip Sets Long-Awaited Terms

It looks like Applied Digital (ADSX) is finally going to see the backdoor play into VeriChip opened up.  VeriChip has made an amended filing with the SEC with its pricing terms being indicated.  The IPO is listed as 4.3 million shares, and the price range is indicated at $6.50 to $8.50 under the NASDAQ stock ticker "CHIP."  The over-allotment is set at 645,000 shares, so the full filing is for 4.945 million shaares.

Merriman Curhan Ford, C.E. Unterberg Towbin, and Kaufman Bros. are the underwriters, and this is likely the last filing before the pricing of the IPO.  This has been covered here as the RFID for people play, and Applied Digital (ADSX-NASDAQ) and Digital Angel (DOC-AMEX) are the backdoor plays into VeriChip’s IPO; Applied Digital owns a majority stake in VeriChip.  If the overallotment is exercised all of the overallotment shares will be sold by Applied Digital, so none of the extra proceeds will directly benefit VeriChip itself.

Here is a more detailed backgrounder on the issue we ran right after the first of the year.  If you want to know how long this has been around, do a web search on ‘Destron Fearing.’  I can personally recall this as an old private placement back in the "Reg. S days" that a company I worked for In Denmark had been inlvolved with back in 1995 or 1996, so this has been around for quite a long time. 

Assuming a mid-point pricing, CHIP will receive $26.9 million from the IPO share sales.  They plan to pay $7 million to Applied Digital for debt repayment; $8.0 to $10 million of the proceeds will used to develop a market for its VeriMed system; and the remaining balance will be used for general corporate purposes.

As of today, ADSX has a market cap of roughly $140 million, and with shares up 2.4% at $2.10 that compares to a $1.81 close-out price for the shares at the end of 2006.

If you would like to receive future emails regarding backdoor plays, special situation investing, IPO’s, and BAIT SHOP emails on buyout candidates then please send an email to jonogg@247wallst.com and label the subject as SUBSCRIBE.  We value privacy and do not share our distribution lists with any third parties.

Jon C. Ogg
January 22, 2007

Posted on: January 22, 2007 – 11:16 am in IPOs, SEC, Shareholder Issues, Small Cap Stocks, Technology Companies

Can Sharper Image Recover From Its Dull Image?

Sharper Image (SHRP-NASDAQ) had a brief pop on Friday because of a filing that sort of shows how the company’s Ionic Breeze(R) and Oze Guard(TM) products were as effective as Pixie Dust.  The company has reached a settlement over the controversial device, and thankfully we don’t have to watch the commercial with the founder and his daughter trying to sell the systems any longer now that he is mostly out of the company.

The agreement provides, among other things: (i) that the Company will sell Ozone Guard(TM) attachments for floor models of Ionic Breeze(R) at a price of $7.00 per unit for 180 days and the Company will design an Ozone Guard(TM) attachment for any Ionic Breeze(R) model which is not compatible with current Ozone Guard(TM) models; (ii) that the Company will test all current and future Ionic Breeze(R) models for ozone emissions using the UL 867 test protocol as conducted through an independent testing laboratory and will not sell any Ionic Breeze(R) model that has not passed the UL 867 standard; and (iii) for certain restrictions with respect to the Company’s advertisements for the Ionic Breeze(R) line of indoor air purifiers. 

Sharper Image will issue a non-transferable $19.00 merchandise credit, valid for one year, to each member of the Settlement Class to be used exclusively to purchase Sharper Image Design(R) and Sharper Image(R) branded products, subject to one merchandise credit per household. The Company estimates that there are approximately 3.2 million members of the settlement class.  It is probably expected that only a small portion of the class will ever get around to using their credit, but that may be because there is such little interest in their stores now.  Many companies have won from consumers not even getting around to mailing in rebates, and Sharper Image isn’t exactly a go-to destination anymore.

Sharper Image used to be cool.  Now they have been ousted by the likes of Best Buy and other specialty retailers.  Have you seen their stores in the last couple of years?  To say they have only seen thinner traffic and lighter sales would be a compliment.  This settlement doesn’t really do anything except maybe get the Pixie Dust product taken care of.  They still have an image issue, and the ‘cool factor’ is by and large gone.  There is a real need to do some soul searching better products, and that is undeniable.

The analysts expect Sharper Image to lose money as far as the horizon goes and the balance sheet is "probably" in disarray compared to the past when it had timely financial SEC filings.  At $9.50, SHRP shares are at the lower rungs of its $8.81 to $16.21 trading range over the last 52-weeks.  In early 2004, this was almost a $40.00 stock.  Jerry Levin was hired for one year to help this with branding and a turnaround, and he has about 8 months left on his contract.  Calling the next 8-months ‘critical’ might be an understatement.

Jon C. Ogg
January 22, 2007

Posted on: January 22, 2007 – 10:11 am in Consumer Electronics, Corporate Governance, Law, Management Change, Retail, Shareholder Issues

Sina’s Blog Empire (SINA)

Sina’s blog section is now larger than its news channel which previously was the top destination at the big Chines website. Or, so says Susquehanna Research. The growth of the traffic channel may well help accelerate the web company’s advertising growth.

No such thing has happened in the US. But, it could. Google (GOOG) has a huge blog platform, called Blogger.com. And, TimeWarner’s (TWX) AOL property has it Weblogs and Netscape businesses. Netscape’s audience has not grown since it changed from being a web portal to a blog portal, but with the Sina news, perhaps that will change.

The blog has not really be exploited in the US the way Sina appears to be doing in China. NetRatings did come out with a study recently that showed the blog sections of newspaper websites growing much faster than the websites themselves.

Perhaps the media companies should look East.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Posted on: January 22, 2007 – 9:15 am in Internet

Cablevision (CVC): The Dolans Were Right

It turns out that investors may have made a mistake by turning their noses up at the Dolan family’s $30 per share offer for Cablevision. Citi cut the company’s shares to a "sell" and dropped the price target to $27. Apparently the bank does not believe that Time Warner Cable or any other company is going to come in with a competing bid. No, it is just the company all by its lonesome.

If Citi is right, most of Wall St. and the Cablevision special board committee that rejected the Dolan’s offer will look like buffoons. No other company made an offer when the Dolan’s made their first, lower bid. So, why would anyone go after the company at a higher price?

Buffoons, indeed.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Posted on: January 22, 2007 – 9:04 am in Cable Companies

Krawcheck’s Reshuffle in Citigroup

Citigroup (C-NYSE) announced the departure of Todd Thomson as Head of Global Wealth Management division to pursue other opportunities and he will be replaced by CFO Sallie Krawcheck once a successor has been found for her in the CFO role.  Robert Druskin, Chief Operating Officer of Citigroup, will oversee Global Wealth Management on an interim basis.

What is happening here is that the media reports on the immediate impact are saying this is a moving her over call, but this seems like getting her into a more active and proactive role.  This is also not addressing what is possibly the inevitable and necessary departure of Chuck Prince as CEO.  He is one of the 10 CEO’s that probably need to leave per our list in December.

So this looks like the first phase of a corporate change there at the financial powerhouse, but there probably needs to be much more.  Citigroup shares are up 1% on the initial reaction at $55.05 in pre-market trading.

Jon C. Ogg
January 22, 2007

Posted on: January 22, 2007 – 8:41 am in Banking, Financial Stocks, Management Change

Pre-Market Stock Notes (JAN 22, 2007)

(ALDN) Aladdin Knowledge $0.28 EPS before items versus $0.27 estimate; 2007 guidance looks a tad softon EPS but in-line on revenues.
(AOS) A.O.Smith $0.62 EPS vs $0.50e; may have gains in number; sees 2007 EPS at $2.75 to $2.95, versus $2.85 estimate.
(C) Citigroup to buy ABN AMRO mortgage unit for estimated $3 Billion; CFO Krawcheck is leaving the CFO position into the head of its global wealth management.
(CHTP) Chelsea Therapeutics International said the FDA has granted Orphan Drug designation to its drug candidate Droxidopa for the treatment of symptomatic neurogenic orthostatic hypotension.
(ETN) Eaton Corp $1.66 EPS versus $1.59 estimate; boosts dividend and started 10M share buyback.
(EXEL) Exelixis received a $60 million payment from BMY on Friday in connection with the effectiveness of the Company’s collaboration agreement with BMS.
(GOOG) Google is supposed to be close to acquiring a videogame advertisement placement firm.
(GY) GenCorp -$0.04 EPS vs -$0.05e.
(INTC) Intel looks to be getting Sun Micro server processor business, Sun has been using AMD in the past.
(LEE) Lee Eneterprises $0.58 EPS vs $0.58e.
(MOVI) Movie Gallery reported wide loss of $1.13 per share, but that was after store closure and other costs.
(NLX) Analex being acquired for $3.70 per share by QinetiQ.
(PFE) Pfizer $0.43 EPS & R$12.6 Billion versus $0.42/$12.25 Billion; job cuts and plant closures coming.   
(PHG) Philips Electronics posted 563 million Euro profit overseas.
(PTEN) Patterson-UTI sees EPS in Q4at $0.95 to %1.00 versus $1.07e.
(RPRX) Repros Therapeutics to sell 2.5 million shares.
(RTRSY) Reuters signed info pact with HSBC.
(SGTL) SigmaTel trading up 9% as its TV Audio solution was chosen by Samsung.
(STT) State Street to acquire Currenex for $564M cash.
(SWFT) Swift agreed to be acquired by CEO Moyes in higher bid at $31.55.
(TWI) Titan International sees negative gross margins but maintains prior sales targets.
(USU) USEC up 1% on slightly raised guidance.

Posted on: January 22, 2007 – 8:27 am in Banking, Earnings, FDA, Financial Stocks, Large Cap Stocks, Management Change, Mergers and Buy Outs, Oil & Gas, Pharmaceuticals, Semiconductor, Technology Companies

Pre-Market Analyst Calls (JAN 22, 2007)

ADCT cut to Neutral at Cowen & Co.
AMGN reitr Outperform at Bear Stearns.
AMSG cut to Neutral at Goldman Sachs.
AMZN upgraded to buy from hold at Stifel Nicolaus; reitr neutral at Merrill Lynch, Merrill cautions on margins.
AVR cut to hold at BB&T.
BA cut to Market Perform at Wachovia.
CLX raised to Overweight at Prudential.
CVC cut to Sell at Citigroup.
DCT started at neutral at Banc of America
ENER reitr buy at Deutsche Bank.
EVBS cut to hold at BB&T.
GUID started as Outperform at Wachovia and started as Overweight at Morgan Stanley; stock up 3% as quiet period ends.
ISIL cut to Underweight at Morgan Stanley.
KMB raised to Overweight at Prudential.
MOS cut to neutral at Banc of America.
MUR raised to Overweight at Lehman.
NCX cut to Sell at Citigroup.
NOVL raised to buy at SunTrust RH
SLE raised to Overweight at J.P.Morgan.
TAP cut to Neutral at UBS.
UHS raised to Overweight at Lehman.
URBN raised to outperform at Piper Jaffray.
VOD raised to Buy at UBS.

Jon C. Ogg
January 22, 2007

Posted on: January 22, 2007 – 8:24 am in Analyst Calls

Sirius And XM: The Myth Of Cutting Program Costs

Analysts who predict future price increases in Sirius Satellite Radio (SIRI) and XM Satellite (XMSR) come up with a "reason a week" that the firms will do better. Both stocks have been hammered down on fears about slowing subscription growth and huge debt loads.

The latest argument is that the companies can cut programming costs now that large deals like the ones with Howard Stern and Oprah Winfrey and behind them. According to RBC Capital Markets analyst David Bank quoted in the NY Post, "Satellite radio is attempting to be a lot more rational with the money they spend on content,"

Go tell all of that to the record companies, movie studios and TV networks. Programing costs never fall. Not as long as their is competition. To get ratings, sell records and get people in to theater seats the high cost of content is a given. Actors and music artists command big paydays because they bring in big revenue. Satellite radio is not likely to be the exception to the rule.

Of course, the two companies could try to shave expenses for talent, but that would raise the specter of slow grow in subscribers again. Less on air talent, less attraction to subscribers. Especially in a world where iPods can be plugged into car stereo systems and cellphones act as MP3 players.

Dream on.

Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that the writes about.

Posted on: January 22, 2007 – 6:22 am in Satellite