Sirius XM (SIRI) has announced that as of the Q2 conference call on July 25th that there has been 391 million shares repurchased as part of their $2 billion buyback program. The cost of those 391 million shares? Nearly $1.3 billion.
Back on April 30th when the Q1 conference call was held, Sirius XM announced that they had spent $494 million to purchase 157 million shares in the first quarter. And that they added to those shares another 52 million shares in April. The price paid for those additional shares was estimated at between $156 million and $164 million by Crunching Numbers. Given that in Q2 there were 195 million shares added (including the 52 million shares from April) for a total of $650 million, it is very possible that Crunching Numbers was not too far off the mark.
Why am I here?
In this article, I plan to use very similar logic and compare against comments to that original article to show support for the title of this (my first) article. Some of you may be asking, why does it matter if they make 600 million shares in the buyback program? Look no further than the words from David Frear on the February conference call:
Now, just for the sake of argument, if you assumed [retirement of] about 600 million shares in our $2 billion buyback program...
Given the price of Sirius XM at the time the buyback was announced in December, the tendency for Sirius XM to understate their guidance and the relatively low price of the stock through February, many took the 600 million shares estimate to be well within reach. Given the most recent update on the status of the buyback program, it is not likely a possibility any longer.
Although Sirius XM is now in the "record business" according to Spencer Osborne, not meeting on expectations or guidance from the buyback is very possibly one of the major weights that is holding the share price down at $3.76 instead of it skyrocketing through the 52-week high and up to $4 as some others have challenged.
If Sirius XM does not meet the "guidance" of Frear from that early call, the questions at the end of the year will be: whether or not Sirius XM was right to carry out the buyback in the manner they did? and will the buyback program be considered successful?
Why does that matter? If the buyback is not seen as successful, it will likely hurt the share price at the end of the year.
Let's get into the numbers
In Q1, Sirius XM paid an average price of $3.15 for 157 million shares.
In Q2, Sirius XM paid an average price of $3.33 for 195 million shares.
Both quarters of the buybacks did reasonably well price-wise considering that an average price for February and March was about $3.13 and $3.29 for April through June. That should make an investor happy to see the money spent while the share price was still seen as being at a discount.
The problem is that an average price of the stock for July is $3.58. Given the performance of Sirius XM in meeting and exceeding guidance, it is not likely that we will see prices below $3.50 again unless there are significant macro-economic impacts that drag down the entire market. That means the rest of the buyback is going to be less bountiful in the shares retired.
We know that an additional 39 million shares were added in July (391-157-195). We also know that through Q2 $1.144 billion was spent on the buyback and that we are "nearly $1.3 billion" through the buyback program.
That means anywhere up to $156 million was spent on those 39 million shares. If we take that average price of $3.58 in July, we get nearly $140 million spent on the shares in July. That would put the "nearly $1.3 billion" at more like $1.284 billion and suggest that there is about $716 million left in the original buyback program.
Where does that leave us looking forward?
We're nearly 65% of the way through the buyback by share count (if using 600 million as a destination) and 65% by money spent. But we can do some better guesstimation than simply stating that we must be on course due to that history. Let's look at the pace of the buyback:
In the first 2 months there were 157 million shares purchased.
Next month (April) 52 million shares purchased.
May and June 143 million shares purchased.
July 39 million shares.
It is no surprise that the months of April and July (after the close of a quarter and before Sirius XM has announced their performance) have fewer purchased shares. According to David Frear in the February call:
...the advice we had was to stay out of the market until we had gotten kind of the material nonpublic information into the marketplace, which I think we effectively do with this call and getting the K filed.
But looking at the overall progression of the program, the number of shares returned has decreased on a monthly basis quarter over quarter. Extrapolating on this pattern, I see Sirius XM closing an additional 130 million shares in August and September for a total of nearly 170 million shares in Q3. If we look at the near term price targets of $3.70 all the way up to $4 from many of the authors on this site, it is reasonable to expect Sirius XM to pay at least between $3.80 and $3.85 for the 130 million shares that I am expecting them to repurchase.
That would cost Sirius XM between $494 million and $501 million and the remaining amount for the buyback would be between $215 million and $222 million available for Q4. Given that many analysts have increased their year end price targets and it is very possible that the stock price will be $4 by year end, that potentially leaves an additional 54 million to 56 million shares to be added in Q4.
Let's do some simple addition
Let me do the math and add up all those numbers:
Q1 (157) + Q2 (195) + Q3 (170) + Q4 (55) = 577 million shares.
That would be a miss of about 4% on the buyback program from the 600 million shares Frear gave as a target. Yes, they can announce another share buyback program and exceed those 600 million shares, but for this program at least, there looks to be a gap in what will be achieved and what was expected.
It was announced that "nearly $1.3 billion" was complete. If Sirius XM has even as much as $750 million left (therefore $1.25 billion spent, which could technically be rounded up to $1.3 billion) in order to buy the remaining 209 million shares they would have to pay on average $3.59 for those shares. A price that we are not likely to be seeing given the recent performance numbers.
Looking back at the missed opportunities the company had to pick up more shares at a discount, raises the question of how well managed a future buyback will be? The effectiveness of the buyback program has a direct relationship with the excitement surrounding the program. If Sirius XM is seen as not being effective at share buybacks, the reward to the share price will not be as great.
Share buyback ends in Q4
I see the share buyback ending in October/November. You have to leave enough time for the board to "meet and discuss" the opportunity for another round of buybacks. If the board wants to stoke the money pits, I think the best time to announce an extension to the buyback would be between Thanksgiving and Christmas. I see a strong possibility that the buyback is completed by the time that the Q3 conference call is held. Even if that means potentially delaying the call until early November.
Announcing an extension to the buyback program on that call would be possible, but I think it would be far more effective to announce it afterwards.
With these figures, it is likely that Sirius XM will return somewhere between 570 million and 580 million shares and very much unlikely that they will meet the original "guidance" of 600 million shares.
- Does that mean I think the buyback will be unsuccessful? No, it does not.
- Given that many, myself included, expect Sirius XM to extend the buyback, we should want to see them get through with this buyback as soon as possible and get onto the next buyback before the company performance drives the share price much higher.
- If the company had reported more solid numbers for the buyback I think we'd be seeing higher prices after the Q2 numbers announcement than we are today.
- If/When Sirius XM announces the next round of buybacks, I think the excitement level will be less and the movement of the share price based upon the announcement will be less.
- I think that the company can make the biggest impact on the excitement of a continued buyback by waiting until the stretch between Thanksgiving and Christmas to announce the extension.
Additional disclosure: I am long SIRI August $3, $3.5 calls, September $3 calls, December $3 calls, January 2014 $3.5 calls and January 2015 $3.5 calls. I have September $3.50 and $4 covered calls.