A Sirius Earnings Preview

Includes: F, LMCA, SIRI, TM
by: Michael Kudrna

We have earnings around the corner so I wanted to update my readers with a Sirius XM (NASDAQ:SIRI) earnings preview and what action I’m taking in light of this. As most of you have seen from my recent trade alerts, I have been long SIRI for a while (over a year) and recently accumulated more shares for the push over $1, which recently came to fruition. I sold some of my position over $1 in anticipation we would see some pressure after the run-up. So far we have not seen too much pressure as we are now testing resistance around $1.13 – 1.15 with earnings expected next week. SIRI recently announced they will be releasing earnings on February 25th.

Initial revenue guidance for 2009 was $2.4 billion but, in January, Mel Karmazin stated SIRI was expecting to report revenues in excess of $2.5 billion much to the surprise of both longs and shorts alike. Subscription growth was very strong in the fourth quarter, beating expectations with the addition of 257,000 new subscribers. Now, SIRI has a total of 18,772,758 subscribers. This is a luxury service in a struggling economy yet subscriptions are not only growing, but growing strong. That in itself is impressive to me and to top it off, those numbers look to be the highest growth rate since the third quarter of 2008. Costs are still unknown so we will have to wait until earnings to see the rest but Karmazin sure has our interest piqued. The stock reflected the great news by quickly moving the stagnant stock from the mid $.60’s in January to closing at $1.13 Thursday.

2008 showed a free cash flow loss of $552 million but now the company announced they will have positive free cash flow in excess of $100 million when they report earnings later this month. That is a milestone achievement as it will be the first time they have positive free cash flow in an entire year. Mind you, this is from a company that was supposed to go bankrupt last year.

The good news does not stop there, as Karmazin stated they have a better than anticipated self-pay churn. Also, for the fourth quarter of 2009, the conversion rate to a self-pay subscription from a trial included in the sale of a vehicle was 46.4%, which was up from 44.2% in the fourth quarter 2008.

Believe it or not, Toyota’s (NYSE:TM) recent struggles may actually help SIRI out. Ford (NYSE:F) is becoming the buyer of choice as the dust settles. January auto sales were up about 17% year-over-year. SIRI has a significantly higher penetration rate in Ford than Toyota and Ford also has increased advertising in SIRI. Also important to note is that Ford has 3 to 9 months extra pre-paid subscriptions on their cars over Toyota. Due to this, we could see higher growth expectations this year.

One year ago SIRI was a penny stock and today SIRI is over a dollar. What can we expect from here? Due to some pertinent information from earnings being released early, analysts have been able to adjust estimates and shareholders have been able to adjust the PPS. You must also keep in mind how the recent trend has been watching the market chew up and spit out good earnings reports. The majority of stocks which reported solid earnings this year have not been met with significant bullish behavior. SIRI seems to trade under the radar of the general market though, which is why it is one of my favorite stocks to hold in my portfolio at the moment. The stock has almost doubled since some of the earnings were released last month. Due to that, I feel the good news may already be priced in with more of a downside risk rather than upside for the short term.

To determine my new short and long term thesis, I will be paying close attention to the earnings release for information on what growth we can expect in net income and subscriptions but possibly more important is how SIRI has done at cost containment. From there, I will determine if analysts are estimating very conservatively or placing a high target for SIRI to reach. I also keep in the back of my mind that Liberty Capital (LCAPA) can dilute shares anytime in the future. On the other hand, I do not foresee dilution happening anytime soon as it could hurt Liberty and their stake in SIRI to do so at this juncture in time. I still feel Karmazin may do an R/S in the near future to tempt more institutional buying and will be looking closely for any hint at that. While I feel an R/S could be a positive catalyst for the stock, I am always wary of shorts taking hold of a negative EPS stock like SIRI and bashing the price back down to unexpected prices. Unless we see some short selling restrictions in place, which is possible this year, I would look to exit SIRI with my profits intact and put my money elsewhere in one of the many other stocks on my radar while I wait for the dust to settle. SIRI is a truly hated stock by many so I will never overlook what the shorts can potentially do to it, let alone have done to it in the past. However, who says I cannot buy it back if I am wrong and the stock continues with upward momentum? A good investor/trader will make quick decisive actions to jump in or out of a stock when the trend makes itself known, even if the initial plan of action was wrong. Good or bad news is almost never priced into a stock within only one day.

With that being said, I recently alerted my readers that I would be pulling some shares off the table after we moved over $1. After doing so, I now have a smaller position to let ride into earnings but, if we continue the upward momentum leading into earnings, I may shave more off to lock in profits and look to add back after the full earnings are released. I have yet to see any real pressure since moving to our milestone price but, I feel we could be setting ourselves up for a sell the news reaction next week. If that does happen and nothing seriously negative is uncovered in the earnings report, I will look to add shares and rebuild my position on a pullback. Had I not established a position in SIRI already, I would look to buy in increments as close to $1 as possible, if not below, and look to add shares after earnings when we obtain more clarity on our short and long term prospect. Make sure you keep your emotions out of any stock, especially SIRI, which is loved by some and hated by many. A clear mind with no emotional attachments will make a better decision than one who treats a stock like their favorite sports team. As always, thanks for reading and good luck out there.

Disclosure: Long SIRI but positions can change at any time.