After Sirius XM (SIRI) released Q3 numbers on October 24th, share prices quickly zipped down from $4.05 at the prior day's close to lows of $3.66 two days later. The slightly less than 10% decline was on extremely high volume. Approximately 400 million shares of Sirius XM exchanged hands in a frenzy of high volume trading not seen since two days in August of 2012. This would be two of the days after Liberty Media (LMCA) closed on its massive forward contract to acquire hundreds of millions of shares of the satellite radio provider in its pursuit of control.
That's a two-year chart. Clearly recent volume has been exceptional to the average, and while sometimes volume and price activity such as this makes perfect sense, at other times it leaves the informed investor scratching their heads.
And that's where I sat while reviewing the price activity after earnings were released. Being away and on vacation, I did not have the luxury of listening to the entirety of the call in real time. Upon return to my hotel that evening, I reviewed the trading activity from the day and then loaded up the conference call, expecting to hear some bad news.
Bad news was not forthcoming. The Q3 call I listened to came reasonably close to a meet of expectations, and thus I began a head scratch "of epic proportions" which intensified the following day as I hopped airports on my way home and watched Sirius XM swing wildly on massive volume.
Were investors disappointed? I doubt it. I have what I would consider to be a nice following of investors as I tend to write only about Sirius XM, and from the comments I received personally most were wondering what the big deal was, and asking 'why the 10% negative move in share price?' Many have heeded my advice and stuck to the plan of buying at or below the 50-day moving average until or unless the "story" of Sirius XM changes. Since it did not change during the call, I and others who had cash ready, snapped up shares in the $3.60's and $3.70's. A deal? In my opinion, yes. Why?
Because I think investors have little to worry about here. The informed understand that one-time charges for debt repayment and refinance at longer terms and lower rates have a long-term benefit to Sirius XM. Thus, taking a charge of just over $100 million in Q3 to place the company in a better financial position at historically low interest rates, while it may cut into Q3's "EPS" rating by two cents, is beneficial. Informed investors understand that projections of $0.02 EPS by analysts were actually beat with earnings of $0.03 per share. Yes, reported earnings were $0.01 per share and appear as a 50% miss but those who focus on the numbers and not the reasons for the numbers are missing the truth here, that the debt refinance caused a $0.02 reduction in EPS.
This is a one-time charge, with benefit to the company going forward. It's not a trend. It's not a recurring charge. It's not a sign that the company is underperforming. Informed investors understood this. Informed investors held their shares.
But what of those who are uninformed? What of the traders? What of the impatient? Shares likely got sold quickly on headlines of earnings misses. "Sirius XM Disappoints" was painted across the news feed. What do you do, then, if you bought some Sirius XM on speculation? What do you do if you are not as informed, or miss the point? You sell, and quickly. After all, all those bloggers can't be wrong, can they? Of course, I say that with a wink, a half smile, and a nudge...
So if EPS did not really disappoint, what did? Was it guidance for the full year or preliminary guidance for 2014? Obviously, at least one analyst at Goldman Sachs was a bit confused and immediately sliced his rating on Sirius XM from buy to hold, keeping a $4.25 one year price target. But again, informed investors were not likely to be disappointed with management's guidance for Q4 2013 and full-year 2014. Why? Because informed investors understand, at least in a general sense, the dramatic shift that is currently underway with Sirius XM's contract with General Motors (GM).
The person to listen to regarding details of this "GM shift" is Spencer Osborne, and he wrote about this issue several times. Consider his article here on Seeking Alpha from over 8 months ago.
While Sirius XM has not gone so far as to name GM as the manufacturer that will see a shift in its deal this winter, it is widely known that the manufacturer in question is indeed GM. The essential thing that investors need to understand as it relates to the new deal is that it is a positive deal over time that will carry short-term "negatives" in the subscriber metric.
Read the article in its entirety, and while you are at it, read his most recent article on the issue as well.
Sirius XM raised the bar on net subscriber guidance today from 1.5 million to 1.6 million. That would appear to be a great thing. However, if you follow the company closely you would have noticed that Sirius XM, just three quarters into 2013 already has 1,681,730 subscribers. Are they really projecting a net subscriber loss in Q4 of this year? The simple answer is yes. The big question is why.
Losing subscribers is bad, so what is happening that would cause a company that has added almost 1.7 million subscribers in the last 9 months to lose 81,730 in the next three?
The answer is General Motors. No, GM is not ceasing with satellite radio installations. In fact, the auto giant is probably installing more satellite radios than it ever has. What has changed is the deal between Sirius XM and GM.
You are now, in terms of the GM contract, a generally informed investor in Sirius XM. You should understand that because of the shift in this contract that certain metrics will be impacted in what appears to be negative fashion in the short term, but in the long term Sirius XM will benefit.
- Subscribers, gross, net, self pay
- Earnings per share
With the GM change comes a shift in how subscribers will be counted. Previously the GM contract were paid promotional subscriptions and thus were counted before the vehicle was sold. This is no longer the case, and subscribers are unpaid trials and will be counted only on conversion. Because the change is immediate, but has a lead / lag effect, the shift in how vehicles sold by General Motors which have Sirius XM installed are counted will take some time to work its way through the system. Short-term negative? It would appear as such. Long-term positive? Yes, in terms of revenue.
Revenue will also take a short-term negative hit. Because the trials are no longer paid promotional trials, the revenue Sirius XM would have received from GM for these trial subscriptions will cease to exist. It is not until these customers convert to paying subscribers that Sirius XM will realize a revenue stream from them. How long will this take? Because vehicles take time to produce, ship, sell, and for trial subscriptions to run their course, you can expect the effects of this to last at least through Q4 of 2013 and Q1 of 2014. Short-term pain? In a sense.
But informed investors should be focused on long-term gains. The contract change also shifts revenue share paid to GM long term. For instance, while a $14.49 per month subscription may have paid $6 or $7 per month back to GM (numbers used for example), this will decrease. Exact numbers are not available but it is reasonable to expect that the agreement is similar to deals Sirius XM has with other manufacturers, and perhaps 25% or less of each subscription will be paid to GM in terms of revenue share. If Sirius XM is able to pay less in revenue share, over time it will be of longer-term benefit to Sirius XM.
Sirius XM's 2014 guidance disappointing? Not to an informed investor. Guidance is reasonable, conservative, and thus, prudent.
Earnings per share
Earnings per share will likely take another hit in Q4 due to one-time debt restructuring charges. It's no more a problem in Q4 than it was in Q3. Informed investors should understand this and expect EPS to come in under those expectations quoted by analysts. Informed investors should understand that refinancing of debt at lower rates for longer periods, so long as it is serviceable, is a good thing moving forward.
Who was disappointed?
Random bloggers. Analysts that lost their focus and understanding of the company. "Reporters" simply reporting the "news." And multitudes of cut and paste headline regurgitators seeking to capitalize on a short-term frenzy of activity.
Traders, uninformed investors, and those with short-term focus or "quick flip" mentalities may also have been disappointed. Buying in at $4.15 on a run up into Sirius XM's Q3 earnings call left all those hands holding shares counting on a flurry of good news and sound beating of expectations that informed investors understood was unlikely to come.
So, what to do now?
My battle cry right now that I have been shouting all year should be ringing in your ears. With Sirius XM performing as well as or better than expected, buy at or under the 50-day moving average should be the name of the game. Today that means anything under $3.84. If you're a Sirius XM investor, prices under that point should appear attractive. Yes, some will have gotten better pricing in the $3.60's, and there's nothing that says share prices will not go lower in the short term.
The key is making a decision and pulling the trigger at the right time. Are you an investor with a plan? This is where you buy. Want to test your mettle with the traders? You can shoot for lower, but you may not get that pricing and your order may never fill. Personally, I don't mind leaving a few cents for the other guy. Much better to have picked up shares at $3.05 at the end of June, currently at $3.73, than to be sitting in cash because you were waiting for $3 which never came.
Additional disclosure: I am long SIRI January 2014 $2 through $3.50 calls. I am long SIRI November 16th $3.50 calls. I am long SIRI November 1st $3.50 / $4 bull call spreads.