Lexus, one of the many cars that comes with a factory installed Sirius XM (SIRI) radio, has had more than its share of television commercials this month, including an ongoing series urging viewers to make this a "December to Remember." Sirius XM seems to have taken this advice to the extreme, with an unusually large number of significant announcements giving an investor a lot to think about. The month of December is not yet two-thirds finished and the news coming from Sirius XM Radio has generated enough headlines to last a... Well, you can fill in the blank.
On December 5th, the company announced it had opened a $1.25 billion credit facility, signaling it was getting closer to returning capital to shareholders. The next day the company announced a special $0.05 dividend to be paid on December 28th to shareholders of record as of December 18th. And it wasn't just the news of the dividend that was released; the company also stated that it would begin a much anticipated $2 billion share buyback program.
It was quite a first week for the month, but the stories did not have much of an impact on the share price. Sirius XM shares closed the month of November at $2.77 and by the end of the first week in December, they had actually declined by a penny to $2.76. So, how was week 2? The shares drifted down, reaching an intra-day low of $2.68 on the December 14th ex-dividend date. Then, late in the afternoon, the Copyright Royalty Board released its decision on the SDARS music royalty rates. The proposed rates to be in effect for the five-year period beginning January 1, 2013, were well received by the market and the shares closed at $2.91, up nearly 7% on the day. One analyst, Jeffrey Wlodarczak of Pivotal Research Group said,
The judges decided that satellite radio music royalty fees would rise from 8% of gross revenue in '12 to 9% in '13 (vs. our 10% forecast), 9.5% in '14 (vs. our 11% forecast), 10% in '15 (vs. our 12% forecast), 10.5% in '16 (vs. our 13% forecast) and 11% in '17 (vs. our 13% forecast).
Pivotal raised its price target from $3.45 to $3.55. And Pivotal wasn't the only one setting a price target more than 20% above the then current prices. On the 18th, Goldman Sachs initiated coverage with a buy rating and a $3.50 price target citing the effects of a buyback on a shrinking share count and increased free cash flow per share. The shares closed the day up $0.04 at $2.96 after reaching a new intra-day post-merger high of $3.01.
On the 19th, CEO Mel Karmazin stepped down six weeks ahead of his previously announced February 1st exit date, and some of the uncertainty about Karmazin's replacement may have been reduced when Sirius XM President of Sales and Operations James Meyer was named Interim CEO. Last week, a Reuters article titled Candidates emerge to succeed Karmazin at Sirius XM had speculated about Karmazin's replacement.
The sub-title of the article was "Meyer among names being looked at in CEO search." Although another internal candidate was also mentioned - CFO David Frear - the focus of the article was clearly on Meyer. Reuters had cited a strong relationship between Sirius XM Chairman Eddy Hartenstein and Meyer, noting that "Meyer worked at Thomson Consumer Electronics, which counted DirecTV as a client when Hartenstein was the satellite TV company's president." Hartenstein, Liberty Media (LMCA) CEO (and Sirius XM board member) Greg Maffei and Sirius XM board member James Mooney make up the executive search committee.
There have also been significant incentives being offered by OEMs leading to a projection by TrueCar for new light vehicle sales to reach 1.43 million this month. With so much good news, it seems surprising that shares barely exceeded the previous post-merger high of $2.97 reached in mid-October.
Is Meyer the Solution?
Whether or not the "Interim" tag stays next to Meyer's new title remains to be seen. I have always thought of him as isolated from both the day-to-day and longer term planning decisions at Sirius XM. Investors should be aware that he does not even live near the company's headquarters. From the 2011 Proxy Statement:
Due to Mr. Meyer's principal residence being in Indianapolis, Indiana, we reimburse Mr. Meyer for the reasonable costs of an apartment in the New York metropolitan area and other incidental living expenses, up to a maximum of $5,000 per month for rent. We also reimburse Mr. Meyer for the reasonable costs of coach class air-fare from his home in Indianapolis, Indiana, to our offices in New York City. We pay Mr. Meyer an additional amount to hold him harmless as a result of any federal, state or New York City income taxes imputed in respect of the expenses for which he receives reimbursement. The costs of these benefits for Mr. Meyer constitute less than 10% of his total compensation.
And it further lists those expenses as:
In 2011, Mr. Meyer was paid $70,000 for rent, $52,309 for travel and $5,240 for utilities. Travel-related expenses include airfare, taxi/car services, and other incidental travel-related costs. In addition, "All Other Compensation" for Mr. Meyer includes $101,322 for reimbursement of taxes associated with these expenditures in accordance with his employment agreement.
His value to Sirius XM is his management of the company's relations with the auto manufacturers, the main source of Sirius XM subscribers. If Liberty chooses to go with a new CEO with more of a background in audio entertainment, Meyer may just be a fill-in until the search committee finds a permanent replacement for Karmazin.
With so much positive news flow around Sirius XM in this December to Remember, the fact that the shares closed yesterday at $2.96 - below the intra-day high of $2.97 reached on consecutive days in mid-October - is a bit disappointing. Much of the good news may have already been priced into the stock, but there are many other potential explanations for the overall subdued reactions of the share price to the news flow.
It's possible that the dollar amount of the share buyback is less than analysts had been forecasting, and, in conjunction with the recent run in the share price, it has become more difficult to put a meaningful dent in the diluted share count. Also, it's impossible to listen to financial news shows without talk of the "fiscal cliff," and it may be weighing heavily on Sirius XM.
There are four major stories over the coming weeks and months that could move the stock to new highs. These are 2013 guidance, a permanent CEO, fourth quarter results, and a decision by the FCC regarding Liberty Media's application for de jure control. The key factor seems likely to be the 2013 guidance. And, with Karmazin, noted for his conservative guidance, now out of the picture, the release of that guidance should be most interesting.
Additional disclosure: I have $3 January 2013 covered calls against most of my SIRI position. I also have a variety of other covered call positions, including $3 December covered calls opened this week. I may initiate (or close) a buy stock/sell option position in SIRI discussed in a recent article at any time. Also, in addition to long-term holdings, I have recently begun day trading 10,000 share blocks of SIRI and may continue to do so. I have no position in LMCA.