Sirius XM: $4 Per Share Will Depend On Q2 Report

Jun.26.14 | About: Sirius XM (SIRI)

Summary

Sirius XM is under significant accumulation.

Short interest in Sirius XM has spiked on increasing prices and declining trading volume.

It's a slow grind until news, likely the Q2 report, presents a catalyst.

I expect the report will catalyze to the upside.

Sirius XM's (NASDAQ:SIRI) share price has been plagued since Q3 of 2013 due to a number of factors. Dropping from highs above $4 per share and bottoming at lows under $3 per share, investors have been sent on somewhat of a wild ride over the past nine months.

What has contributed to these undulations?

  • Reports of "slowing growth."
  • A pause in Sirius XM's share repurchase plan.
  • An offer and then retraction of an equity swap by majority owner Liberty Media (NASDAQ:LMCA) to take control of Sirius XM.
  • Contract adjustments with General Motors (NYSE:GM) affecting how and when new subscribers are counted.

With the passage of time, issues can be reversed or influence on the share price can dissipate, and I believe that is what is being seen in the share price of Sirius XM as of late.

Slowing growth.

On the topic of slowing growth, it should be well understood at this point by many that the larger something gets, the harder it is to grow that same thing by the same percentage. I discussed this last year. In short, slowing growth of new subscribers on a percentage basis should not be the main focus of Sirius XM investors because it is inevitable. As time wears on any and all subscription-based services slow their growth, and as time wears on the thing that becomes most important is monetization and maintenance or slow growth of the customer base.

Cessation and resumption of the repurchase plan.

After months of repurchasing shares last year, Sirius XM halted its repurchase plan for several months, removing a very large amount of buying pressure from the market. While a pause in a repurchase plan should not affect valuation of a company, it can certainly affect trading. Without that defensive "wall" of purchases, and with the share price facing uncertainty from some investors due to issues listed above, selling largely eclipsed buying, causing a significant retrace in the share price.

What may be bad news for shorter-term investors may have contributed to a longer-term benefit for the company and those investors who have a multi-year horizon. With Sirius XM having resumed its repurchase program near $3 per share, the company can arguably purchase a much larger number of shares than if it had continued to purchase above $4 per share. $2 billion purchases 667 million shares at $3, or 500 million shares at $4.

Liberty Media's "offer."

This is now long out of the way, and was a huge chunk of uncertainty for investors. Not only did many investors not understand that this was an equity swap, but some writers persisted (and still persist) that investors should have "taken the deal" because the deal valued Sirius XM, in Liberty equity, at a price per share higher than it is today.

Investor confusion coupled with author confusion or simply "disingenuousness" likely scared some into selling. I've yet to meet someone who indicated they bought out of personal fear or uncertainty.

With this issue having long passed under the bridge since Liberty's retraction, the effects on share price should be minimal.

The "GM" contract adjustment.

The adjustment to Sirius XM's contract with General Motors should have passed through the system over the past several quarters. Due to the lead/lag time of when one purchases an automobile, the "trial" subscription running its course, and then the decision by the customer whether or not to convert to a paying subscriber, the shift was a multi-quarter issue.

I'll spare the details of the contract shift as they have been covered quite well by Spencer Osborne over at siriusbuzz.com. Investors simply need to know that "the worst of a good thing" should be behind them.

Here and now.

And that moves us forward to where we are today. Q2 ends in a few days and Sirius XM will likely report these numbers at the end of July. The share price has been slowly increasing from the low of $2.98 reached several months ago, and today closed off of that low by 16% at $3.46, just shy of last week's highs at $3.49.

Am I expecting ground shattering positive news? Not particularly. But I am expecting a well received Q2 report. Given that previous reports have been poorly received (Q3 2013) or received with lukewarm reaction (Q4 2013, Q1 2014), then a good quarter might be just what the doctor ordered.

Why do I expect a good Q2 report? I'll discuss a few reasons and their potential effects.

Sirius XM has been under significant accumulation since resumption of the share repurchase program. Expect a lower outstanding share count to be communicated in the Q2 report. Fewer shares equal more company ownership per share which, over time, as cash flow balances off debt should equal increased share price. The buyback also serves as a bit of a slowly rising floor, potentially trapping short sellers over time as the share price steadily increases due to the buying pressure it offers. Significant technical breaks in the share price can and often will force covering or bring in new buyers / traders.

Sirius XM's share price is marching toward a critical level. The 200-day moving average is a long-term indicator and a breach to the upside here could be considered a significant positive event. Essentially, a multi-day hold beyond this level is "all systems go" from a technical standpoint.

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Leading into the Q2 call I expect the share repurchase program to provide support and a slowly increasing share price up to that 200-day moving average in white. Throw the short sellers into the mix who should surface near what is resistance at the 200-day moving average, and time should close the gap between where shares are being bought and where they are being sold.

That could create a situation where a breach of that 200-day moving average on a decent Q2 report could cause significant short covering to ensue, moving the share price upwards rather quickly toward the $4 per share level.

Additionally, Q2 may not suffer as the previous two quarters have due to the General Motors contract shift. Those trials on cars sold since the shift should have had their trial periods expire, and subscribers who convert to paying from "free" will be added to the paying subscriber number. Time has removed the "problem" of the shift. Because of this, when compared to the previous two quarters, Q2 may look much better.

Last but not least, it does not appear that Q2 will contain a significant number of one-time charges. Legal costs, debt refinancing, satellite launches, these all drag on earnings per share and thus perception by the street and subsequently the headlines of articles posted after the report.

The bottom line.

Often a catalyst is needed to break key levels in share price. I expect the next possibility of such a catalyst to come with Sirius XM's Q2 report in the next several weeks. With the company's buyback plan raising the floor, short interest soaring and volume decreasing, there are the makings of a mini "perfect storm" for the share price to make a significant move one way or another. I'm looking for a move to the upside, and for the share price to head to the $4 level sooner rather than later.

Disclosure: The author is long SIRI. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long SIRI January 2015 $2.50, $3 and $3.50 calls. I am long SIRI July 19th $3 / $3.50 bull call spread.