Sirius XM: This Crisis Will Be Very Different

| About: Sirius XM (SIRI)

Now there is more bad news for the U.S. economy and the stock market in general. The new headlines are switching from the fiscal cliff to the debt ceiling. As many investors recall, this created major economic havoc in the financial markets in August of 2011:

Investors fearing a stock market plunge - if the United States tumbles off the "fiscal cliff" (this) week - may want to relax... But they should be scared if a few weeks later, Washington fails to reach a deal to increase the nation's debt ceiling because that raises the threat of a default, another credit downgrade and a panic in the financial markets.

The good news is that Sirius XM (NASDAQ:SIRI) seems to come through some of the macro economic problems better than the rest of the market. And as I have said in numerous articles, Sirius has been one of the safer investments during this type of monetary chaos. Here is how the shares performed during the last debt ceiling crisis:

Prices from Yahoo Financial

Date Open High Low Close Volume Adj Close*
Aug 12, 2011 1.89 1.95 1.86 1.87 99,470,400 1.84
Aug 11, 2011 1.76 1.88 1.75 1.86 97,756,000 1.83
Aug 10, 2011 1.76 1.79 1.72 1.73 94,399,500 1.70
Aug 9, 2011 1.71 1.80 1.66 1.80 126,037,800 1.77
Aug 8, 2011 1.69 1.79 1.63 1.65 183,301,000 1.62
Aug 5, 2011 1.94 2.01 1.73 1.89 163,306,400 1.86
Aug 4, 2011 2.04 2.04 1.94 1.94 129,757,900 1.90
Aug 3, 2011 2.08 2.10 1.96 2.07 101,808,300 2.03
Aug 2, 2011 2.18 2.22 2.02 2.07 139,876,600 2.03
Aug 1, 2011 2.22 2.22 2.06 2.11 138,808,700 2.07
Jul 29, 2011 2.04 2.13 1.99 2.11 114,485,700 2.07
* Close price adjusted for dividends and splits.

On August 2, President Barack Obama signed legislation designed to reduce the fiscal deficit by $2.1 trillion over 10 years. But that was well short of the $4 trillion in savings S&P had called for as a good "down payment" on fixing America's finances.

And then on Friday August 5, 2011, the U.S. credit rating was downgraded by Standard & Poor's which sent the markets worldwide into a downward spin. Sirius dropped from a high of $2.22 on August 1, to a low of $1.63 on August 8, as investors everywhere sold in a panic. However, by August 12, Sirius was back up to a high of $1.95:

Chart forSIRIUS XM Radio Inc.

Looking at the chart, Sirius stayed above the other market indices during that time, and quickly recovered at a much higher percent than the rest of the market. However this year there are a lot more positive things in play, compared to 2011.

First, Liberty Media (NASDAQ:LMCA) now owns almost half of the reported 6.51 billion shares (or the equivalent) of Sirius. And with FCC approval, the company plans to buy more shares within 60 days to take it to the 51% mark. This announcement could happen at any time. Right now there are approximately 3.26 billion shares that are not owned by Liberty.

Additionally, institutions currently own 1.827 billion shares of Sirius according to NASDAQ. This leaves only 1.433 billion shares for the retail float. Sirius has approved a $2 billion buyback which at the current price of $2.90 would permanently retire 690 million shares. If the buyback retires all of the possible 690 million shares from the float, it would leave only 689 million retail shares. And if the price of Sirius were to drop, for a short time, to $2.50, which is the 200-day EMA, Sirius could purchase and retire as many as 800 million shares. I say for a short time, because if that happened the shares would suddenly shoot up dramatically with such high volume:

Chart forSIRIUS XM Radio Inc.

If the FCC has not approved the Sirius takeover, Liberty would participate in the buyback on a pro rata basis. This means that it would sell enough shares to keep it from going over 50%, which would be a violation of its FCC application. Liberty's CEO Greg Maffei has made no secret of the fact that the company wants to use immediate Sirius buybacks to get the "bait" money back for the 11% of Sirius that Liberty will end up having to buy for the takeover:

The next 11 points have cost us well over $1 billion something if we got to 51. We would probably like to get the bait back on the 11 points.

We've noted that there is flexibility in the capital structure at Sirius, there's plenty of availability for them over the next short-term to lever further and return capital to shareholders including ourselves, and whatever we did, we would be unlikely to want to spin out high basis stock, we'd probably given how much we've already shrunk Liberty Media over the last several years. We'd probably include this Starz transaction, we'd probably be wanting to get that cash back. So, that would be the biggest consideration in our minds, a major one.

This first round of buybacks will only produce $1 billion (on a pro rata basis) of the reported $1.6 billion the company has spent so far. This does not include the additional $200 million Liberty will need to spend to take it to 51%:

Macquarie analyst Amy Yong expects the buyback to be implemented in 2013. Yong estimated Liberty spent about $1.6 billion in recent months to raise its Sirius XM stake from 40 percent.

So there would have to be another $1.6 billion buyback very soon for Liberty to be able to get its estimated $1.8 billion. According to the statement by Maffei, the entire 11% would have to be recovered immediately, before a spin off. If the buybacks are pro rata with Liberty participating, it would wipe out over a billion retail shares at the current price of $2.90. It could theoretically buy back all of the retail shares if the stock were to fall to $2.57. Or Liberty itself could buy up those shares once it gets FCC approval to do so. Liberty does not seem to like retail shares, considering that it has bought a lot of its own retail stock with buybacks. Right now 92% of its float is owned by Institutions and Mutual Funds:

% of Shares Held by All Insider and 5% Owners: 9%
% of Shares Held by Institutional & Mutual Fund Owners: 84%
% of Float Held by Institutional & Mutual Fund Owners: 92%
Number of Institutions Holding Shares: 374

There are 370 million Sirius shares that are recorded as being sold short. And there will probably be less than a billion retail shares (15% of the company) left after the first buyback. So, 370 million short shares is a whopping 37% of that. This could make it very difficult for short investors to cover without sending the shares soaring in a short squeeze. And if the second buyback wipes out all of the retail float, the shorts will be dealing with the institutions.

And many of the remaining retail shares are owned by a huge number of investors that bought when the shares were under $1. One notorious Seeking Alpha writer used to call them the Sirius "Perma Bulls." For them, the current economic problems are a cake walk compared to what they went through when the shares were under a buck. They will most likely continue to hold and add to their piles with any dips, just as they always have. Sirius XM employees also fall into the retail category. And many of them own sizeable amounts of stock: i.e. Howard Stern.

So as the retail shares shrink, more shares are going into stronger hands. Some could argue that the institutions might sell their some of their shares. But most smart money will realize the value of the buybacks, and hold their positions. Just as the institutions have held their ground with Liberty. Many of them believe in John Malone.

The short data drove analyst Stephen Faulkner to question the sanity of these investors to even consider shorting under these conditions. Because the company is not only fundamentally sound, but the revenue is expected to be up for Q4 and the year, and earnings are projected to double in Q4. Also, the growth estimate for the next five years is expected to be 27.87% per annum which not only beats the industry and the sector, but also the S&P 500:

Growth Est SIRI Industry Sector S&P 500
Current Qtr. 100.00% 212.70% 9.20% 9.40%
Next Qtr. 0.00% N/A 29.60% 15.00%
This Year 657.10% 54.00% 30.10% 7.10%
Next Year -81.10% 20.60% -14.80% 13.10%
Past 5 Years (per annum) 0.00% N/A N/A N/A
Next 5 Years (per annum) 27.87% 16.64% 14.15% 9.10%
Price/Earnings (avg. for comparison categories) 5.48 33.71 -6.50 12.49
PEG Ratio (avg. for comparison categories) 0.20 2.06 0.33 1.34
Revenue Est Current Qtr.
Dec 12
Next Qtr.
Mar 13
Current Year
Dec 12
Next Year
Dec 13
Avg. Estimate 898.74M 910.84M 3.41B 3.82B
No. of Analysts 13 9 15 15
Low Estimate 890.79M 900.85M 3.40B 3.73B
High Estimate 915.47M 921.84M 3.43B 3.86B
Year Ago Sales 783.74M 804.72M 3.01B 3.41B
Sales Growth (year/est.) 14.70% 13.20% 13.20% 11.90%

As the chart shows, the average estimated revenue for Q4 is close to $900 million. This is compared to revenue in Q4 2011 of almost $784 million. The consensus among these analysts is that there will be at least a $400 million gain in revenue for 2012. And the Q4 net sub additions will be announced at any time. The consensus among analysts is that these will be historically high for the year.

So is Faulkner right? It is very tempting to say "yes." But I think that their (short investors) reasoning may be influenced by all of the fiscal cliff and debt ceiling fears. And those fears are definitely to be taken into consideration.

But again this time, the situation is very different. These are not uncharted waters now, and many of the investors that panicked last summer will play the hand differently this time. When it happened in August 2011, it was during the summer "Sell in May and Go Away" time of the year. In contrast, this time we will be right in the middle of the "January Effect" when stocks jump higher. Still, there will probably be a major tree shake or two until all of this is resolved. But a lot of the Sirius fruit has already been picked and canned; and it is being stored far away from greedy hands. For the shorts and anyone else wanting to begin a position in Sirius, or add to an existing one, the pickings are going to be mighty slim in 2013.

Disclosure: I am long SIRI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.