James Meyer, the new CEO of Sirius XM (NASDAQ:SIRI) was/is on the "Hot Seat" for Sirius CEOs, thanks to Liberty Media (NASDAQ:LMCA), Sirius investors, and analysts. Liberty, the new majority owner of the company, has promoted him to that coveted job at Sirius, made famous by its former CEO Mel Karmazin. One of my criticisms of Meyer was the fact that he sold $30 million worth of his Sirius stock last November, alongside Karmazin who was leaving the company.
But now, with his new title in hand, he seems to have reversed his attitude. Meyer bought some of his stock back on Thursday. He purchased almost 1 million shares at a price of $3.30 per share. And he acquired options to buy over 10 million shares at $3.30 each, which can be exercised in 2015, and expire in 2023. This appears to be a major indicator that he thinks $3.30 is a good price to buy into the company.
Why the sudden change? Especially when Sirius missed its Wall Street expectations last Tuesday as the earnings were reported. Right now even a narrow miss can have severe consequences on the share price of any company. Earnings per share was 2 cents, up 15%. However analysts were expecting 3 cents a share, up 50%. And revenue was $897 million which was the low estimate for the quarter. When he and Sirius CFO David Frear spoke on the conference call, they gave the results a little more color:
(1) The net sub additions for Q1 were 453,000 up 12% over the same time last year, which was the best net additions in a first quarter since the merger.
(2) There was one less day in the quarter which explained the slight miss in revenue. Most analysts knew this, but some retail investors may not have.
(3) There will be a new holding company formed in the next several weeks to provide more financial "flexibility".
(4) The buyback has started with the retirement of 209 million shares.
(5) Liberty Media is firmly onboard, and everyone is seeing "eye to eye" on strategy.
When the Q&A period began, Goldman Sachs analyst Matthew Niknam asked if the creation of a new holding company means that the buyback will be accelerated:
Matthew Niknam - Goldman Sachs
Hi, guys. Congrats on the quarter and thanks for taking the question. A question on leverage, so you alluded to the 2.5 turns of leverage ending the quarter, it's about a turn below the traditional target. Are there any updates you can provide in terms of how quickly you're seeking to get there, to the target? And in conjunction with that, there's a formation of a holdco imply you might be open to accelerating the buyback pacing potentially this year? Thanks.
David J. Frear - EVP and CFO
The formation of the holdco is one of those things that simply gives us optionality. I don't think you should read anything into timing on it. There's a lot of administration associated with getting it set up, so just one of those options that you want to set up as soon as you can. On getting to the leverage target, I think as many know that we are somewhat restricted or will be somewhat restricted later in the year with - by two of our debt issues in making restricted payments that we will probably work our way to that 3.5 times sort of over the next several months perhaps into sometime early next year.
On Thursday, May 2, Sirius further fueled the flames of a possible accelerated buyback when it announced that it will offer a total of $1 billion in Senior Notes which can be used for additional share repurchases, among other things:
SiriusXM intends to use the proceeds of the offerings of the new Senior Notes for general corporate purposes, which may include, from time to time and as market conditions warrant, share repurchases and the repurchase, redemption, defeasance, tender or repayment of its outstanding indebtedness. Specifically, the company intends to repay all outstanding drawings of $150 million under its revolving credit facility with a portion of the proceeds from the offerings. Pending application of these amounts as provided above, the company currently expects to maintain any excess amount as cash on hand.
The current buyback was approved for $2 billion. If we assume that the first 209 million shares were purchased for an average of $3.15 per share, the cost would be $658 million. This means that roughly one third of that buyback is complete. To accelerate it by another billion dollars would send the shares toward $4 very rapidly. And the fact that the new CEO is gobbling up stock will add more interest in buying Sirius shares which are already up 50% over last year:
Because the insider buying activity at Sirius outweighs the selling, investors may want to follow their lead. After all they do have the inside scoop. According to Nasdaq:
Sirius XM Insider Transactions
|Type||Last 3 Mo.||Last 12 Mo.|
|Number of Insider Trades||3||66|
Number of Open Market Buys
View: All Purchases
|Number of Sells||2||32|
|Total Shares Traded:||1,404,848||5,359,023,161|
|Number of Shares Bought:||984,848||3,297,165,060|
|Number of Shares Sold:||420,000||2,061,858,101|
Keep in mind that a lot of the "sell" sales over the last 12 months were from Karmazin exercising his options before he left. And do not forget that Sirius has a large short interest this month. The latest numbers show over 378 million shares sold short. Considering the price has jumped from a low of $2.98 on April 22 to a high of $3.39 on May 1, there are presumably a lot of shorts that need to cover before the options expire May 17.
Sirius XM Share Price
|May 3, 2013||3.33||3.39||3.32||3.36||38,811,900||3.36|
|May 2, 2013||3.34||3.35||3.28||3.30||43,864,400||3.30|
|May 1, 2013||3.23||3.39||3.23||3.36||96,408,300||3.36|
|Apr 30, 2013||3.12||3.25||3.12||3.25||127,807,800||3.25|
|Apr 29, 2013||3.14||3.15||3.06||3.07||46,960,400||3.07|
|Apr 26, 2013||3.12||3.15||3.12||3.12||25,147,800||3.12|
|Apr 25, 2013||3.15||3.15||3.11||3.12||32,243,100||3.12|
|Apr 24, 2013||3.12||3.15||3.12||3.14||23,707,800||3.14|
|Apr 23, 2013||3.02||3.11||3.01||3.11||30,811,500||3.11|
|Apr 22, 2013||3.01||3.03||2.98||3.03||19,809,800||3.03|
Based on all of this, the price should continue higher for another week as the bulls enjoy a short squeeze. And the pressure will build as the company buys more shares and retires them. If you do not already own Sirius, there could be a dip after the options close which would be a buying opportunity. Or you can follow Meyer's lead and buy now. He is not waiting.
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.