Scrambled signals for XM Satellite

Wall Street is debating whether defects in the digital radio broadcaster's satellites will throw a wrench in the quality of the company's broadcasting service.

3 min read
Wall Street is getting scrambled signals about XM Satellite Radio, as analysts debate whether defects in the digital radio broadcaster's satellites will be bad for business.

Problems with the solar arrays that generate power for the company's Boeing 702 satellites have been acknowledged since last September, when Boeing said the solar arrays could degrade sooner than expected. XM Satellite Radio has since said the problem could affect its two satellites as early as 2005. Analysts are now debating whether that will throw a wrench in the quality of the company's broadcasting service or in its otherwise strong business.

XM Satellite Radio, based in Washington, D.C., offers 101 radio channels from two of its satellites, called "Rock" and "Roll." Along with rival Sirius Satellite Radio, it is licensed by the Federal Communications Commission to broadcast via satellite.

Although sales are doing well, the faulty satellites could endanger business, according to Timothy O'Neil, an analyst at equity research firm SoundView Technology Group.

"There remains a high degree of uncertainty related to the performance of XM's satellites and whether insurance providers will cover losses associated with systemic anomalies on these satellites," said O'Neil, who downgraded XM Satellite's shares to "underperform" from "strong buy" on Monday. The stock has been flagging since January. After the downgrade, shares dropped Monday from $7.76 to close at $7.41, and were down to $7.30 in late trading Tuesday.

O'Neil said the company has not officially filed an insurance claim, but warned that the size of a claim needed to cover the $250 million satellites could make approval difficult.

Aside from the financial impact the company would incur if its claims were rejected, O'Neil said there are other financial problems. The company will need around $360 million in funding to reach a cash-flow break-even point in late 2005, according to his calculations.

Other analysts believe the satellite problem is overblown.

"Speculation regarding the insurance industry's possible failure to perform on a potential series of claims is unfounded at this point," Merrill Lynch analyst Marc Nabi said.

Lehman Brothers and Ladenburg, Thalmann & Co. have issued research notes advising investors to look at the fundamentals of the company and to ignore worries about insurance coverage.

"Any problems are likely insured," said Lehman Brothers analyst William Kidd, who noted that the company has five-year insurance coverage on its in-orbit satellites.

Analysts also said that a slight loss in power wouldn't affect the quality of XM Satellite Radio's services. Even if the satellites' quality degrades, there should still be enough power to broadcast effectively, according to John Stone, an analyst with Ladenburg, Thalmann & Co.

Stone said the solar arrays in question are designed to be larger than necessary and have excess power. Even if power degrades, the overall effect will be a "very gradual decline," he said.

The lifespan of the solar arrays is about 15 years, according to Boeing spokesman George Torres. But he added that the lifespan and power capacity varies on a case-by-case basis, since each satellite is unique.

"It's reckless to lump them into one bucket," he said.

XM Satellite Radio said in a statement that it has seen no degradation in the solar arrays yet, and that the satellites are not expected to fall below specifications before the latter half of this decade. It also said it had advised its insurance carriers last September of the situation, but has filed no claim. The company declined further comment on the issue.