Sirius Announces Earnings Date, Hits a New 52-Week High - How Should You Play It?

Apr.25.11 | About: Sirius XM (SIRI)

Sirius XM (SIRI) surged to another new 52 week high this morning (4/25) of $1.95 per share as it is set to announce its results for Q1. The company just issued a press release stating that May 3rd is in fact the date of the report - as has been hinted to previously.

An excerpt from the recent announcement is as follows:

NEW YORK, April 25, 2011 /PRNewswire/ -- Sirius XM Radio (NASDAQ: SIRI) today announced that it plans to release first quarter 2011 financial and operating results on Tuesday, May 3, 2011.

Investors eagerly anticipate what are expected to be stellar numbers; the stock has given them no indication to expect otherwise as it continues to be one of the best performing equities so far this year. Last week, the stock rose 7% -- partly on a recent BUY recommendation by John Tinker, Senior Media Analyst for Maxim Group.

As earnings approach, Tinker expects Sirius XM to report Q1 ARPU of $11.81, up $0.01 quarter-over-quarter and up 2.9% year-over-year. Noting that Sirius XM recently lowered the music royalty fee from $1.98 to $1.40 for 60% of its subscribers, he doesn’t see ARPU ramping up again until a potential price increase later in the year. In a recent article, I made a case that Sirius would consider increasing the basic rate price by at least $2 as early as this August. This would have a significant long term impact on ARPU, which is one of its key metrics.

In light of what we’ve just seen with respect to the stock, it is safe to guess that a lot of people share my optimism, including Tinker, who along with his buy recommendation issued a $2.20 price target on the stock last week. Tinker previously upgraded his price target from $1.80 to $2.20 on February 16th following Sirius XM’s Q4 results. In fact, his exact quote was as follows:

We continue to recommend the stock with a price target of $2.20, a multiple of 20x estimated 2012 estimated free cash per share of $0.11. The stock is currently trading at 17.9x 2011 EV with a long term EBITDA growth rate of 24%. We are anticipating a share buyback as free cash flow grows. Liberty Media (LCAPA) is in the wings with its 40% holding and appears to be interested in increasing its stake if SIRI slips and accessing the $8 billion NOL.

As we have been discussing for a couple of weeks now, Tinker noted that “it is not unusual for SIRI to trade up going into earnings and then subsequently fall on the reported results”.

I think we are beginning to see evidence of this. It also helps tremendously that the company is now on such strong fundamental metrics. As great as the stock may perform, without a great company behind it, investors would only be playing Russian roulette.

The strategy

Last week I told you that Sirius’ stock would reach $1.90 by April 29th. I was wrong. To my pleasant surprise, it occurred last Thursday (4/21), 5 trading days sooner that I was expecting. If you account for the new 52 week high of $1.95 that it just reached, Sirius’ stock is up an impressive 33 cents from its $1.62 low, or 20% so far for the year. But as you can see below, the momentum that is driving Sirius’ stock clearly started as early as last September and there is seemingly no end in sight.

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A couple of weeks ago, I shared how I was playing the typical earnings run. It was met with both skepticism and dispute. Readers questioned it to the point where I was forced to issue an update, and I obliged. But one thing it made readers do was think whether it could work.

Where are we today?

Let’s revisit the strategy considering what we know now with respect to SIRI’s new $1.95 plateau. Two things just occurred that merit an adjustment in strategy for those of you following at home. First, SIRI reached $1.90 five sessions sooner than I expected. Secondly, with the earnings date now known, let's look at some of the adjustments we've made so far since the strategy was introduced on April 4th. In the interest of author accountability, or “keeping the record straight”, let’s look at what we’ve already discussed.

Previous prediction on April 3rd:

At the precise time the original strategy was written, the price of Sirius' stock sat at $1.65 (20 trading days prior to earnings report). I made a bold prediction and suggested that the stock price would reach $1.90 by April 29th. I also noted that the correction would start on the day of the announcement and subsequently settle in a trading range of $1.75 - $1.85 between May 6th and 9th. I stand by those statements.

Adjusted on April 18th:

I revise the latter part of the prediction upward and adjust my predicted settling range instead to $1.77 - $1.87; I had cause to be more optimistic. In my opinion, a lot of the exuberance has to do with the fact that though Sirius has only guided for full-year EBITDA of $715 million on 12 million vehicles sold, there is reason to expect an upward of close to $745 million on the possibility of 13.4 million vehicles sold as Sirius is known to notoriously low ball its projections. So, with this new information, it is worth making a few adjustments to our strategy.

Revised strategy, where is the stock going?

All things aside, I can appreciate the value that readers place on this question. After all, that’s what every Sirius investor wants to know. Should I buy, hold or sell? This is never an easy question to answer. Since the publishing of the original strategy, Sirius’ stock has risen from $1.62 to where it reached this morning (4/25) at $1.95. It did not arrive to this level without some help, nor do I have reason to believe it will not go higher. In my April 18th adjustment, I revised the post conference call settling range to $1.77 - $1.87. As the stock appreciates, so will its key moving averages or points of support. I just wanted to mention that here, but I will get back to this in a moment.

What do we do now?

After today (4/25), there will be 6 trading days left as we approach the date of the announcement. Now remember, the original plan called for a typical earnings run of 20 to 25 cents leading to the day of the announcement. If this holds true, then we need to ask another very important question, when did this current run begin? This question alone is important because the answer will also tell us not only when the decline will begin, but also the stock’s post announcement settling range.

At its new 52 week high and current price of $1.95, I’m going to use $1.76 as the start of the run. I use $1.76 because not only was it Sirius’ 50 day moving average, but it was also the average price in which Sirius traded prior to the two litigation bombshells, Howard Stern’s lawsuit and the one of the class action variety.

Now, with $1.76 being the start of our run, this tells me Sirius still has 8 to 12 cents left to climb leading to the earnings announcement. This date, as mentioned, is 6 trading days away. As you can see from the chart below, Sirius started this week at $1.80 and has had a higher closing price each day since Tuesday for a net gain of 13 cents, or 7% for the week, culminating in its $1.95 high. This is pretty significant on seemingly no news.

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This week is going to be interesting and where money can be made or lost. It will not be for the faint of heart. My guess is that the stock alternates between gains and losses for the week. But the key point to keep an eye on is the volume. It spiked up last Thursday (4/19) 14 million more shares above its average. This is always a good sign, but let’s also keep an eye on where it starts for the week and where it ends; a net positive is what we want. Not necessarily a focus on the down days, those are going to come as normal.

If we agree that it has 8 to 12 cents left to climb, it means we can expect a price of $2.01 to $2.05 as being the high for this earnings run. But don’t mistake this number for a cap as it can go as high as investor sentiment will allow. With the conference call now firmly set for the 3rd of May, you can expect to see the share reach $2.01 to $2.05 by the 2nd. The price will then likely commence its decline upon reaching its peak on Monday and initiate its gradual retrace the day of the announcement to culminate in its settling range between the 6th and the 9th.

As mentioned above, I previously revised the settling range to $1.77 - $1.87. However, with such bullishness that we have witnessed, (you will applaud this), it is worth again revising upward to a new range of $1.80 to $1.85. With such momentum on its side, the idea of a sub $1.80 price at this point is hard to put on paper. Should it occur, I will be comfortable in knowing that it would likely be the result of macro-environmental conditions and not the result of any adverse fundamental aspect of the company.

Summary

We often say to ourselves, “I wish I knew then what I know now”, that is to say, if I had this information before, I would have done something differently. Well, there’s another saying that goes, “past performances are often a great predictor of future results”. Using those two quotes was the genesis for this strategy. While it’s not perfect in concept, it comes pretty close to helping seize some additional gains both on the long side and short side if you wish to play the post conference decline.

I hope this all made sense. But the question you need to ask yourself is, how are you going to play it? I applaud those who are holding for more gains. But taking profits is never a bad thing, either. After all, what are we investing for? I don’t know any poker player who has ever made money that’s never left the table.

Disclosure: I am long SIRI.