Friday's activity in shares of Sirius XM (NASDAQ:SIRI) in my opinion confirmed what should be the beginning of the next leg up on the steady rise in share price that has been seen for the second half of the year. Running from lows in the $1.80's in July up to after hours trading which hit $3.10 on December 14th, Sirius XM has seen appreciation of 72% in that time frame.
The reasons are varied.
The company has performed extraordinarily well despite some of the most die hard critics and perma-bears going so far as to call Sirius XM investors "hopeless" and "stupid." Consistently beating guidance, paying down debt, and growing at a rapid pace in the face of the boogeyman that is internet radio, the company has proven itself even as its detractors booed and hissed from the sidelines.
Liberty Media (NASDAQ:LMCA) has helped bring the share price of Sirius XM up in its pursuit of control of the company. Now sitting just shy of 50% ownership and awaiting FCC approval, Liberty's strategic purchases of Sirius XM from the hands of shorts have helped it maintain bullish bias, and served to catapult the stock not once, but twice. It appears now that this may be three times.
On top of this Sirius XM has issued both a dividend of $0.05 per share, which will pay out on December 28th, and an intent to repurchase up to $2 billion of stock in order to reduce the float. Not only should this increase buying pressure substantially going forward, but it helps show the new position that Sirius XM is in compared to a few years ago. Instead of crumbling under a mountain of debt and needing more, Sirius XM has shown itself to be a cash cow, raking in free cash flow and paying down old debt in short order. Dividends and buybacks are a way to return capital to Sirius XM shareholders, and over $2 billion will certainly be appreciated.
As I wrote recently, I've been waiting for a catalyst or simply for the stock to run its course of consolidation, in order to send share prices to new highs.
11/20 : Sirius XM : Opportunity to $3.30
I believe the news that the CRB has set Sirius XM's royalty rates at 9% for 2013, increasing by 0.5% per year after, was enough to release the arm of that catapult.
Section 114 Rates: The Judges determined that the appropriate Section 114(f)(1) rates for Preexisting Subscription Services for 2013-2017 are 8% of Gross Revenues for 2013 and 8.5% for 2014 through 2017.
The Judges determined that the appropriate Section 114(f)(1) rates for Preexisting Satellite Digital Audio Radio Services for 2013-2017 are 9% of Gross Revenues for 2013, 9.5% for 2014, 10.0% for 2015, 10.5% for 2016 and 11.0% for 2017.
Why is this news so important? Why did it cause a rush of nearly 70 million shares worth of volume in the last few minutes of trading on Friday?
The expected increase was supposed to be to 13% royalties for 2013 alone. A 9% rate certainly is of huge benefit to the company and will save hundreds of millions of dollars over the next five years. Compared to what SoundExchange was seeking, the savings will be close to $1 billion. This news is material, and it's a big deal to the company and investors alike. This is bigger than a penny beat on earnings in a quarter, or subscribers that come in at 50,000 beyond expectations. Four percent may not sound like a lot, but the savings here will be considerable.
And this is why I don't expect share prices to simply snap back to the $2.60's that the stock languished in on Friday. I believe the coming week will see additional short covering, and I believe the coming week may even see some buying by those who were waiting on the CRB judgment. Add here what I feel will be reinvestment by many of the dividend they receive on December 28th, and you are looking at a recipe for continued appreciation. The question here is, how high can it go? For this, I'm sticking with my $3.30 target. That's the highest I am comfortable with in the short term until guidance for 2013 is known.
Any pullback from the current price in the low $2.90's should be looked at as a bargain for the long term investor. The only concern here has more to do with the macroeconomic situation and the "fiscal cliff" than Sirius XM itself. Those with a more bearish macroeconomic view than I may wish to exercise a bit more caution.