Sirius XM's $2 Billion Buyback Raises Floors And Busts Ceilings

| About: Sirius XM (SIRI)

It's a simple concept really. Sirius XM's (NASDAQ:SIRI) $2 billion buyback program which was announced in December of 2012 creates buying pressure in the stock, and no small amount at that.

Given that Sirius XM's market cap was roughly $20 billion at the time of the announcement, and given that approximately 50% of the company was owned by Liberty Media (NASDAQ:LMCA) as well as roughly 30% of the company was owned by institutional investors, that left 20%, or roughly $4 billion worth of the company in the retail float. Arguably, Liberty Media would not be selling its shares anytime soon, and institutions were unlikely to unload in great quantities. That left the retail float as the provider of the lion's share of, well ... shares, for Sirius XM's buyback plan.

Because of this, I expected that the share price of Sirius XM would have strong support and would find a stair stepping pattern of appreciation with rising support during periods of consolidation followed by pops once the share price was squeezed enough. It's similar to the type of behavior seen as Liberty Media was buying shares for control. Supply dwindles as shares are bought, and the buyer must move the share price up to acquire more shares.

Has this happened? Yes. Arguably it has. When you consider the 1 year chart of Sirius XM a sort of stair step pattern of appreciation is readily apparent.

Up, over, up, over, up, over. It should be clear to see. That green line there? That's support, and what I have been stressing is a good indicator of a strong buy area at or below it.

It couldn't get more simple, and I would expect that so long as the company performs within 2013's stated guidance, the buyback plan will push the stock to new heights reaching $4.25 before January 2014 option expiration.

Fellow author Spencer Osborne had a great article recently which outlines how to figure Sirius XM's valuation model. It's worth a thorough read, and readers should pay close attention to the following excerpt:

Heading into the doldrums of summer, we may see this equity reach impressive levels on the fact that the company, via share buybacks, is supporting the price of the stock. I anticipate that the company will go well beyond the $2 billion that it committed to buybacks and this support dynamic will continue to exist. In fact, I believe that once Liberty Media (LMCA) begins to participate in these buybacks that the news will be more publicly known, as Liberty Media would want to sell its shares at as high a price as possible.

While share buybacks are happening, I believe that there is a distinct possibility that this company can touch an EV/EBITDA multiple of 27 under the right conditions. Further, as 2012 passes, and it becomes clear that Sirius XM is hitting EBITDA targets, the market will begin to make assumptions regarding future EBITDA and thus allow a higher valuation.

Simply stated, there is justification for the current trading levels based on the historical multiples that this equity has traded at. There is justification for appreciation from here due to strong company performance and a better macro-economic environment. Lastly, the share buyback dynamic is yet another justification for a higher valuation.

I see Sirius XM as a buy on virtually any dip. I think the realistic price goal is currently about $3.75 with spikes to $4.25.

Spencer's opinion mirrors mine almost exactly, and that's comforting to know as I value Spencer's opinion on Sirius XM above most others.

If a bona-fide analyst is more to your liking, consider the following attributed to John Tinker, senior analyst at Maxim Group:

Tinker sees further growth, estimating 57% year-over-year growth to 16.8 cents per share for full-year 2013 - "post an aggressive share buyback of $2.64 billion or 800 million shares." Sirius XM's officially announced stock buyback program amounts to $2 billion. While Tinker does note that the company does have some debt covenants "which may prevent it from pursuing an aggressive share repurchase program," he points to previous comments from both Liberty Media Chairman John Malone and CEO Greg Maffei, which indicate that the covenants can be "worked around." Tinker expects Sirius XM to lever up to 3X net debt/EBITDA, from net debt of $1.9 billion in 2012 to $3.57 billion in 2013, with the assumption that Sirius XM pursues an aggressive share buyback - subsequently increasing it from the previously announced $2 billion to $2.64 billion.


Tinker's 12-month target price of $4.20 is based on 15x his full-year 2014 free cash flow/per share estimate of $0.28 - post share buybacks.

Let's take a look at a near term projection which I still believe is on track. Consider what I said back on May 10th when I urged investors to hold for an impending pop through $3.50:

So why hasn't the stock appreciated much beyond $3.40? Where is the $3.50 and beyond I am looking for? Take a deep breath, calm down, and remember the long term fundamental story. Now, with over a week behind us, let's take a quick look at the short-term technical.

It's a near textbook ascending triangle on the 60 minute chart. Decreasing volume, steady highs and increasing lows are shown here. That's bullish, and it shows that bears are losing out vs. bulls.

Three days later, $3.59 was hit. So what now? And why am I still suggesting the share price may hit $3.75 sooner rather than later? Consider the above, and then take a look at the chart below.

The formation in the center should look familiar. It's the ascending triangle as discussed previously. The yellow line, or 50 period SMA on this 60 minute chart has been holding strong, and the subsequent pop to $3.59 appears to be forming yet another ascending triangle on the right.

It really becomes a matter of patience going forward. Investors can be tested in times like these, and need to understand that this is healthy behavior for a stock. Look at the sideways movement as a settling down period, and one which is supported by Sirius XM's buyback program the entire time. It's a rising floor that should eventually bust through the ceiling and create a new high.

This is something long-term investors dream about. Steady, strong, consistent appreciation. And this author will take this type of behavior over whipsaw pricing and a lot of unanswered questions, euphoria, fear and panic any day of the week.

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.

Additional disclosure: I am long SIRI January 2014 $2 and $2.50 calls. I may sell my position to enter into other opportunities briefly in early June.