Just recently Goldman Sachs (NYSE:GS) upped its 12-month price target for Sirius XM (NASDAQ:SIRI) to $4.25. A smart move, but one that arrived more than a day late to the game and in my opinion may even prove to be a dollar short once July of 2014 comes around.
Did I just suggest that Sirius XM could hit $5.25 by July of 2014? Yes I did. Of course, that hinges on continued strong company performance and increases to Sirius XM's $2 billion buyback total as well as overall market cooperation, but it's entirely possible.
But right now I am not looking so far out. I'm focused on the turn of the year, and January 2014 option expiration. 6 months I am comfortable with.
Since the beginning of the year I have been expressing a $4.25 price target for January 2014. Actually I gave a range from $4 to $4.50 at the time. But given Sirius XM's most recent announcement of 715,000 new net subscriber additions as well as observations from a technical standpoint, I'm forced to add a bit to my target. Those who have been following along will remember I did similar last year, when I started the year with a $2.75 end of year target later upped to $3 per share. As investors, we must modify our expectations when conditions change.
My new target for January 2014 is $4.50 per share, and I believe that will represent fair value at that time if Sirius XM continues to perform. From a technical standpoint, if I were to give a range of possible prices, I would say between $4.20 and $4.70 on the low and high ends. This may be a wide range and of course I will explain why from a technical standpoint after getting through the fundamentals.
Continued company performance is critical.
In order to continue to perform with its share price, Sirius XM must also continue to perform as a company. This means continuing to not just meet but rather exceed its own conservative guidance. This will require continuing strong sales of new cars in order to provide those new trial subscriptions Sirius XM relies on for most of its net additions. This will require expansion of the used car program and other special programs such as Sirius XM's free two months for inactive radios when you take your car to the dealer for service.
It will be important for investors to pay attention to numbers from the Q2 call which should come in early August. Net new subscribers are important, but so are self pay net additions, churn, average revenue per user, and financial metrics such as free cash flow. Making sure these numbers are better than previous quarters on positive issues, and stable or even less than previous quarters on negative issues will be important.
The market must cooperate.
Bernanke has done a great job propping up the market with QE while the country gets back on track. At some point, though, QE will ease and eventually end. Will the economy be strong enough to carry the market at that point? I like to believe and hope that it will, but you know what they say about hope and a nickel, it will buy you a hot cup of jack squat. The proof is in the pudding on this one, and for Sirius XM to continue on the mid-to-high end of its trading range, the market must be in bullish mode.
The buyback must be increased.
$2 billion is the current stated amount of Sirius XM's buyback. While this is great for 2013, it will eventually run out. Given the current pace of the buyback, I expect the funds will run out before the end of the year. Without the support this provides to the share price as it returns capital to shareholders by shrinking the float, my estimates would be forced to change. The current trend requires a buyer. In 2012, the buy was Liberty Media (NASDAQ:LMCA). Now, the buyer is Sirius XM. I'll be looking for another $1 billion or more to be added to the total. Sirius XM has the cash flow to handle the additional debt, and interest rates are at historical lows. A buy back just makes sense, and an increase to an already successful buyback makes similar sense.
The current trend must remain intact.
From a technical standpoint Sirius XM has followed a very clear channel of appreciation. This has offered traders great opportunities to make significant gains by timing the market. It has also burned some overzealous traders, like this guy who is about to take nearly $1 million in losses on a bad options play. Take a look at the following chart going back 1 year to the point Liberty Media started its purchases. The trend should be quite clear.
You will notice three white lines in the chart above. These represent, roughly, the high end, mid range and low end of Sirius XM's 1 year trend. Yes, the price has exceeded the high line, and the price has dropped below the low line, but the majority of time has been spent near or between the two.
These lines assist me with my expectations for the end of the year. Does this mean Sirius XM has to follow this trend? Absolutely not. But I see no reason to expect anything different absent changes to the fundamental issues explained earlier.
So where are we at right now? We're heading for the high end, and given the recent good news of 715,000 new net additions it seems the Q2 call may provide some great fundamental support for Sirius XM's next run. The present range is as follows :
Of course, history has shown that prices can and do exceed the extremities, but these prices provide a good guide if people wish to trade Sirius XM. For investors who are long the stock and can see $4.50 in January as I can, you should also see and expect traders to zig and zag the stock on the way there. It's not manipulation, guys, it's how the market works. You can attempt to join that game if you wish, or you can choose to hold and add to your position when prices get near that bottom line.
$4.50 in January of 2014.
That's my new target. This is 20% above the last closing price of $3.73. Remember, it is based on both fundamental and technical issues which need to remain intact through the period. If Sirius XM, the market, or the trading range strays from the norm, investors can expect the share price to stray as well. Between $4.20 and $4.70 is my expectation of a reasonable range of fluctuation on the low-to-high side. Any way you slice it, though, current pricing should appear very attractive in 6 months and beyond.
Additional disclosure: I am long a series of SIRI bull call spreads $2, $2.50, $3, $3.50 and capped at $4 on the higher end. I will likely modify this as opportunity provides to adjust for my increased expectations.