Sirius XM (SIRI) has so many good things going for it right now. As expected, the stock shot over $3 a share last week, and hit another 52-week high of $3.15. This is the highest the shares have been since March of 2008. But the biggest question on some people's minds is: Will this rally continue? If the last four years are used to project the future performance, it should continue upward:
The shares were trading with very small volume around Christmas due to the typical Holiday slowdown. However the "Cliff Deal" on Wednesday sent the stock up to $3.04 on the tails of a worldwide rally. Then on January 3, the new car sales for December were announced. And even though many investors expected the news to be good, the shares still rallied higher. But later that afternoon when news began to leak that Liberty Media (LMCA) had gotten FCC approval for the takeover of Sirius, the volume spiked and the price remained firm, at or above $3.08; hitting $3.17 after the market closed. Then on Friday the rally continued as investors realized that this FCC situation was over. The uncertainty gone. And there would not be the damage to the company that occurred during the 2008 merger. When many blamed the FCC for dragging its heels and sending Sirius stock down to pennies a share.
|Jan 4, 2013||3.09||3.15||3.06||3.10||107,391,100||3.10|
|Jan 3, 2013||3.04||3.10||2.99||3.08||80,051,000||3.08|
|Jan 2, 2013||2.95||3.04||2.95||3.02||84,920,500||3.02|
|Dec 31, 2012||2.88||2.91||2.88||2.89||47,769,300||2.89|
|Dec 28, 2012||2.89||2.92||2.88||2.89||33,521,600||2.89|
|Dec 27, 2012||2.93||2.95||2.90||2.91||29,660,200||2.91|
|Dec 26, 2012||2.94||2.96||2.92||2.93||19,111,000||2.93|
|Dec 24, 2012||2.93||2.95||2.93||2.95||15,452,500||2.95|
So What's Next?
The main catalyst driving the growth at Sirius is the automobile industry. Almost 70% of the new cars being built today have satellite radios installed. And Sirius expects this number to go even higher in the future. Last year was the best year for new car sales since 2007. And the industry expects 2013 to beat 2012 by at least one million units:
Sales of new cars and trucks increased 9 percent in December, a gain that put total sales for 2012 at about 14.5 million vehicles - the industry's best performance in five years, according to the research firm Autodata.
That represents a 13 percent increase over 2011, and raises expectations that demand will continue to rise as more Americans need to replace their aging vehicles with new models.
Auto executives forecast that the United States market would grow to at least 15.5 million this year and possibly higher, if housing starts and other economic factors continue to improve.
However some people think that these numbers represent missed opportunities for Sirius. The company has been criticized in the past for not marketing itself enough. Forbe's contributor Joan Lappin blames outgoing CEO Mel Karmazin:
The growth of the satellite industry has been more or less continuous but it has not yet grown to its full potential. There are presently more than 243 million cars and trucks of all ages on the highways in the United States. Yet, after all these years, penetration for paid radio is still less than 10% of the vehicles on the road. Karmazin has never figured out how to break through that barrier and take Satellite Radio to the next level. Growth now is some percentage of new car sales. Good car sales years mean good sales for Sirius. Progress the last year or two proves that point.
Right now 50 million of those automobiles do have Sirius XM radios installed in them. Which means that only half of those owners have subscriptions. The company projects that number to double to 100 million cars with satellite radios by 2018. If Lappin is right, then with a new CEO at Sirius, shareholders may see the stock go to that "next level". Some investors are hoping the company will go global.
Executive Vice President and Chief Financial Officer David Frear will be speaking at the Citi Global Internet, Media and Telecommunications Conference in Las Vegas, this Wednesday, January 9, 2013 at approximately 9:00 am PT. Investors will be very anxious to hear what he has to say. Typically the net sub additions for the year, are announced right about now. This is important because the subs make up most of the Sirius revenue. The more subs there are, the more revenue and earnings there will be for Q4 and 2012. They are expected to be historically high at around 2 million net additions.
Liberty CEO Greg Maffei will speak at the same conference the day before, at 4:30 pm PT. Although he is expected to talk about Liberty, he may say something about Sirius. And usually there is a Q&A session afterwards that might draw questions about Liberty's plans for Sirius. A lot of Sirius investors will be listening for any news.
The next thing that will affect the stock price is something that the bears don't like to hear. It is extremely simple economics. Supply and Demand. From now until the options close on January 18, there are investors who may have to cover their short positions. The latest numbers show that the short interest is 370 million shares. And the options charts show that a lot of those data are for this month. Also there are a lot of $3 calls that should be "in the money" at that time. Depending on when they bought the calls, and how much they paid, many will probably exercise their rights to buy those shares.
Add to this the fact that the company itself is buying its own shares as part of a $2 billion buyback. And now, Liberty may be buying shares under its agreement with the FCC to get to over 50% ownership of Sirius within 60 days of the application's approval. All of this buying activity will create a shortage of shares that all of these people will need at the same time. Shrewd Sirius Longs are adding to the "problem" by purchasing more shares. Because if the shares continue to escalate, the price could hit the high target of $4 this year. Some people think once the squeeze is over, the price will drop back. But that is only true if the company does not have enough value. If the Q4 results are good, and the price soars to $4, the investors that buy at that price do so because they think the stock is worth it. And they will not turn around and sell it for less.
Rumors Will Arise
There are a couple of things that will come up in the very near future. The first is that there are some people that think that when Liberty converts the rest of its preferred shares to common, it will cause share dilution. This is absolutely false. The Liberty shares have been accounted for on each and every SEC report. And all of the earnings have taken those shares into account.
Also, I have heard some investors say that the shares will be diluted when, and if, Liberty spins its shares to its investors as part of a Reverse Morris Trust. They think that Liberty investors will all sell their shares at the same time which would sink the stock price. This again is not dilution. I wrote an article about this last summer, which explains all of these rumors in detail.
Some of the highlights of that article include the fact that the majority of Liberty is owned by institutions and insiders. There are very few retail shareholders. These investors will not sell a stock just because it suddenly fell into their portfolio. Most of them own Liberty Media because it owns Sirius. Sirius is Liberty's biggest holding. Anyone that does decide to sell will owe brokerage fees and taxes. The RMT does not exempt investors from capital gains taxes. Also, the RMT will not happen right away. Liberty executives have said that they want to first do the buybacks and sell the stock that was used to raise its Sirius stake from 40% to over 50%. For those that think this "big sale" might sink the stock, forget it. The shares will be purchased by Sirius and retired.
What To Do?
Ironically, now the buybacks offer uncertainty. Trying to time them would be next to impossible. But as the layers of uncertainty peel away, it is much easier to determine what the price will do. Right now I expect it to stay over $3 until Frear speaks on Wednesday. If he has any disappointing news, the stock might drop a little bit, depending what that news is. I really do not expect anything negative at all. Rather I think it will be positive, which could ignite another rally designed especially for the short investors. Once the options close there could be some dips between the 19th and the first of February. If the price does go below $3, it would be a good time to buy. Looking at the chart above, Sirius has not dropped below its 50-day Moving Average in over six months. So, I don't expect that it will drop that much now. And, keep in mind that this is also the time that there is a run up to earnings: And the Conference Call that will give the 2013 Guidance.
Disclosure: I am long SIRI.