Wednesday, May 28, 1997

CD Radio, Inc.
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Phone: 202-296-6192
Price (5/28/97): $17

HOW DID IT DOUBLE?

CD Radio is cranking up plans for the millenium. And while consumers have a long wait to hear the tunes, investors have been jamming out as the stock price has launched into orbit.

On April 2, the CD Radio paid $83.4 million for one of two licenses auctioned off by the Federal Communications Commission (FCC) for the rights to the S-band, a new radio frequency at 2310 to 2360 megahertz. Once it gets its satellites into place, the company will begin offering CD quality radio direct to your automobile. The stock skyrocketed on the news.

The licensing deal was sealed by a successful private placement of $135 million in convertible preferred stock. By April 30, LORAL SPACE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LOR)") else Response.Write("(NYSE: LOR)") end if %> was already at work building CD Radio's two satellites. From an uncertain $3 plus back in February, these shares have recently visited Lucy in the Sky at $20 1/4 before giving up some gains.

BUSINESS DESCRIPTION

CD Radio wants to create an entirely new industry: a kind of wireless cable radio for cars. By late 1999 at the earliest, it hopes to commence broadcasting 30 channels of commercial-free music programming and up to 20 channels of all-news, all-sports, and all-talk programming. Likely customers among the owners of America's nearly 200 million motor vehicles include the one million long-haul truckers and the millions of folks who live in rural areas, where the radio options can be limited.

CD Radio's advantages over traditional radio? It will offer finely focused formats, widespread signal coverage spelling the end to signal-fade, commercial-free music, and CD quality stereo. Customers can pick up the signal with a silver-dollar-sized antenna and a special radio that will also play regular AM/FM. The company plans to charge a monthly fee of $10 or less for the service.

FINANCIAL FACTS

Income Statement

      12-month sales: N/A
      12-month income: ($2.8 million)
      12-month EPS: ($0.28)
      Profit Margin: N/A
      Market Cap: $175.1 million

      Balance Sheet
      Cash: $1.1 million
      Current Assets: $1.1 million
      Current Liabilities: $0.2 million
      Long-term Debt: N/A

      Ratios
      Price-to-earnings: N/A
      Price-to-sales: N/A

HOW COULD YOU HAVE FOUND THIS DOUBLE?

The FCC auction was well publicized in advance. Finding this double meant buying the story and placing your bets. Clearly the safest time to do that was either shortly before the auction (spread your bets among the bidders) or just after the auction, when the media coverage sent the winners into the stratosphere. In either case, you're talking speculation, but speculation built on the rationale that a long-range business plan was one crucial step closer to fulfillment.

WHERE TO FROM HERE?

How do you value a company due to raise at least $465 million dollars more over the next four years to launch an essentially untested product built on a questionable business model? I honestly don't know, and no analysts are willing to try.

There are so many question marks. Will the satellites get built and launched successfully? Will the company be able to raise the money it needs? Will car manufacturers include the special CD radios as standard? If not, can the company induce subscribers to buy entirely new car stereos likely to cost $50 more than normal? Heck, will electronics manufacturers even make the radios? Then there's the subscription model. How many people will pay the monthly fee? The company has said it needs 350,000 customers to break even.

If you can't discount future cash flow with any certainty, valuation becomes a guessing game. What's certain is that between now and November 15, holders of the preferred stock will be able to convert their stake into common stock at a rate progressively discounted to the future stock price (see the 8-K filing for details). Over the next six months, the number of shares outstanding could double, with the convertible owners having incentive to short against their positions or sell the shares immediately upon conversion.

This looks like a build-it-and-they-will-come story that could very easily lead to nothing but a field of dreams.

-Louis Corrigan ([email protected])

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