Seeking Alpha
Long only, research analyst, portfolio strategy, media
Profile| Send Message|
( followers)  

We're all guilty of it. While it is the responsibility of authors to extensively research the material and opinions they publish, sometimes we miss a critical issue or fail to research appropriately and in the process mislead readers. Intentional? Not usually.

So what's the issue here? I've been receiving numerous emails and comments today suggesting that Sirius XM (NASDAQ:SIRI) has not really reduced its diluted share count since the same time last year.


(Click to enlarge)

After a bit of searching I understand that this sentiment is coming from an article written by Motley Fool writer Rick Munarriz entitled Sirius XM Smokes Its Shorts.

Let's take a look at the part of his article which is causing the uproar :

It's not just the frustrated pessimists placing buy orders to cover their short positions. Sirius XM revealed this morning that it has spent $1.3 billion this year to buy back 391 million shares. The only negative point there is that the number of fully diluted shares outstanding over the past year has only shrunk from 6.51 billion to 6.48 billion in that time. The media darling is going to have to do a lot more buying -- and a lot less issuing -- if it seriously wants to make a dent in its huge share count.

Something just didn't sound right to me here. How could Sirius XM have spent $1.3 billion to reduce its outstanding share count by only 30 million shares? I was not aware the company had issued so many shares in the past year.

The short answer here is that they have not, and clues may be found within the 2012 annual report released in February of this year. To properly understand the buyback let's take a look at the quarterlies and annual from November of 2012 up until the most recently released July 26th report.


(Click to enlarge)

If you notice, since the buyback program was put in place earlier this year the outstanding diluted share count has decreased from 6.873 billion to 6.447 billion. The buyback program most certainly is reducing the share count.

What Munarriz is being misled by here is the fact that between the Q3 and annual report for 2012 the outstanding diluted share count increased from 6.577 billion to 6.873 billion. This is an increase in shares outstanding by 296 million shares.

So where did they come from? Did Sirius XM issue 296 million shares in the last quarter of 2012?

No. And a little basic math points to the culprit here. Investors will remember that a significant number of shares have been tied up in Sirius XM's $1.875 convertible debt, or alternatively what has been called the $550 million senior secured notes. $1.875 multiplied by 296 million gives you $555 million. Throw in a few shares for options added to those notes and we have the culprit right here staring us in the face. These shares have simply been recognized in the diluted count as of the 2012 annual report.

When researching numbers such as this it is not as simple as just going back to the same period report 1 year prior. There are far too many moving parts here. Several reports must be looked at to understand what is going on. Do not be misled by claims that Sirius XM's buyback has been ineffective. Sirius XM's buyback most certainly has been effective in reducing the share count.

Source: Sirius XM: Do Not Be Misled By Claims The Buyback Is Not Working