Sirius XM: Worried? Don't Be

| About: Sirius XM (SIRI)

I have often read that if one is not in a constant state of worry that they are not paying attention when it comes to the market. Read between the lines and what does that say about the bull?

He's not paying attention. He's a mere child, foolish and chasing butterflies right across a busy street.

I mean, we're bombarded with this every single day. Those who are always cautious or always negative may even appear more intelligent than those who are bullish. I understand full well that my bullishness when it comes to Sirius XM (NASDAQ:SIRI) has probably painted me as irresponsible or foolish in the eyes of many over the years. I can't begin to count how many times I have had someone tell me to "take profits" and "get out now!" since I began encouraging others to buy after John Malone's Liberty Media (NASDAQ:LMCA) saved Sirius XM from bankruptcy.

The cautious reasons offered by those suggesting selling or even shorting Sirius XM have been wide and varied. From concerns that Liberty Media would use Sirius XM as cash grab or worse, strip it of its valuable spectrum, to concerns that internet radio services such as Pandora (NYSE:P) would cause a mass exodus in Sirius XM's subscriber base, none of these issues have really panned out.

The company has, quite simply, rejected every single major concern so far. Subscribers to Sirius XM continue to grow at a rapid pace despite Pandora's respectable performance, and Liberty doesn't appear to be interested in some sort of smash and grab. They are not quickly ratcheting up Sirius XM's debt load in order to spin out the company.

As an investor in Sirius XM, one has had to endure a constant stream of negativity from $0.05 per share all the way up to recent highs of $3.85. Are these bears onto something now that Sirius XM has retreated about 20 cents? I don't think so, and I will explain why I am not worried, and investors should not be, either.

Not immune

First and foremost, as I have said many times, Sirius XM is not immune to the overall market. A quick glance of the chart below plotting Sirius XM vs. the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) should show striking correlation. 'The market' has tremendous weight and can push or pull equities up or down with it regardless of the performance of the underlying security. The most recent pullback? A simple mirroring of the market.

My advice? Shed worry. Buy here, at or near the 50 day moving average as I have been maintaining for the better part of the past year now. That's the yellow line in the chart below, or as of today just about $3.60. Some may choose to wait until the green trend line, which now sits around $3.40, and where you buy should be paired with your opinion of the market as a whole. Remember, the market itself has a gravity that weighs upon all equities.

This is not a simple technical issue. Yes, technicals can and will help with setting buy or sell points, but they don't tell the underlying story of the stock. So what are the fundamental reasons for being long Sirius XM? What will drive Sirius XM to new heights going forward?

$2 billion in buybacks and beyond

Investors are well aware that Sirius XM has been repurchasing its own stock for the better part of 2013. From announcing intention in late 2012 to executing the plan through 2013, the company has repurchased shares at a good pace and as of the Q2 conference call had purchased nearly $1.3 billion worth of its own shares which were then retired, shrinking the float.

It is my expectation that Sirius XM will expand this buyback program in the future, and investors should expect Sirius XM to continue to buy back shares through 2013 and into 2014. As an investor I am not placing any expectations as to the exact number of shares or cash value of shares to be repurchased. I expect the buyback to be expanded beyond $2 billion, and if the company proceeds I will adjust my expectations based on the company's stated guidance.

I am also not concerned with the price at which Sirius XM buys back its shares today. $3, $3.25, $3.50, $4 per share? While it is arguably better for the company to repurchase at $3 per share than at $4 per share, in the long run I am of the opinion that it will matter very little. 5 Years from now if Sirius XM is trading at $10 per share, the small difference between $4, $3.50 and a $3 repurchase rate is the difference between good, better, and best. $4 per share at a future $10 per share price would mean a 150% return, and $3 per share at a future $10 per share price would mean a 233% return. Certainly $10 per share in 5 years may sound ambitious to some, but you get the point.

Consider my question to John Tinker, senior media analyst at Maxim Group in this radio interview at Satellite Radio Playground. I asked John if he viewed increasing share price as a problem, and his response? It's a problem of "success."

That's a 'problem' I can handle.

Multiple streams for new subscribers

Historically Sirius XM has added subscribers through conversions of trial subscriptions on new vehicle sales. While this has been a great driver of new subs, as time goes on current subscribers purchase new vehicles. Losing a subscriber on their old vehicle and adding a subscriber on their new vehicle has a net effect of 0. As the market becomes more saturated, the issue becomes how to add additional subscribers based on those deactivated radios in used cars.

Enter two additional streams of new subscribers.

Sirius XM has expanded its used car program to over 10,000 dealerships, driving new subscribers through free trials in used cars. Now, when that current Sirius XM subscriber trades in his or her vehicle for a new Sirius XM equipped vehicle, in many cases their old radio is offered as a free subscription to the next buyer. Hardware costs in this case are $0, and thus every new subscriber is more quickly a profitable subscriber.

In addition, Sirius XM just announced that it has begun its Service Lane program:

"Service Lane builds on the success of the SiriusXM Pre-Owned Vehicle program, which has surpassed 10,000 participating dealers across the country and includes most of the nation's top franchise dealer groups. Now SiriusXM and participating dealerships are able to reach many more satellite equipped vehicle owners, who otherwise may not have had the opportunity to fully experience a SiriusXM trial subscription."

Dealers who are interested may sign up at no cost to them, and are provided with a valuable carrot to entice buyers and service customers with free trials to dormant Sirius XM radios.

More trials = more conversions, and trials on "paid for" radios are valuable in that they are almost instantly profitable on conversion to paying subscribers.

An acquisition with future promise

For some, Sirius XM's story is a bit boring. More subscribers = more cash flow = higher share price, over and over and over again. I'm always a bit shocked when people are bored with a stock which has performed as Sirius XM has over the past several years, but in a way I get it. There had been nothing which had taken Sirius XM outside of the box to date. That all changed with Sirius XM's announcement that it will acquire Agero's connected vehicle business for $530 million before the end of the year.

The connected vehicle unit of Agero is the leading provider of innovative telematics services, offering safety, security and convenience services for drivers and end-to-end, turnkey solutions for automakers. Following the acquisition, SiriusXM will provide connected vehicle services to more automotive manufacturers -- including Acura, BMW, Honda, Hyundai, Infiniti, Lexus, Nissan and Toyota - than any other telematics provider.

Is this not exciting news? I'm rather shocked that the street seems to have passed it over with a bit of ho-hum attitude so far. I'd expect the number one subscription radio provider acquiring the largest telematics services provider to be bigger news. But perhaps the street needs a bit of time to warm up to this one.

Understandably due to the cloud of uncertainty surrounding this deal, and very little in the way of information, some may be adopting a wait and see approach. Well, color me a little more excited than most. In my opinion this is a very strong acquisition for Sirius XM, giving them the ability to package a suite of in vehicle services together. Some may only want satellite radio and some may only want telematics, but for an extra $X there should be a group of people who will go for both. Priced right? That group's size could be substantial. There will likely even be those who would not get satellite radio or telematics alone, but having both together would make the package attractive enough to get both.

Being the dominant player in one area is one thing, being the dominant player in two is even better. That said, being dominant in two areas that go hand in hand, as Forrest Gump would say "like peas and carrots" can create a situation where the whole is greater than the sum of the parts.

Look at it this way. If I have company A and company B, both with 20 million subscribers, and both are profitable, I am in good shape. If I can somehow get those who subscribe to A, to also subscribe to B as a package deal, and the same in reverse, then I am in great shape.

Time will tell how Sirius XM's acquisition of Agero's connected vehicle business plays out, but I am quite bullish on the prospects and excited to see what Sirius XM does with this acquisition. It's certainly a perfect fit.

Climbing a wall of worry?

Don't. Certainly, there are some questions as to whether or not the overall market will correct, whether the Fed will begin to "taper" and if so, when, and if equities can continue the gains they have shown for the better part of a year now.

Sirius XM, for me, is a longer term play outside of the market noise. Because of this my concern as to the overall market is the opportunities it affords me to add to quality investments with a good fundamental story such as Sirius XM. The market goes up and the market goes down, but quality stocks will outperform the indexes over time.

So come down off that wall of worry, plant your feet firmly on the ground, form a plan, and buy those dips. Sirius XM will continue to outperform.

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 calls at all strikes from $2 to $3.5 per contract.