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Are we there yet? Are we there yet? In primate messages, these are the questions I continue to received from Sirius XM (SIRI) investors who are now excited about the direction of the stock; and who can blame them? At times it is even hard for me to contain myself with the recent surge. Investors want to know when my $2.75 price target will arrive; my response -- in due time.

Just in case you missed (and many of you did), Sirius opened the week at $1.97, it reached a high of $2.25 and closed for the week at $2.19. Psychologically, closing at or above $2.20 would have been nice, but I will take the net result; which by my calculations is an 11% gain. It is amazing what a difference a week can make. Sirius showed no signs of life at a price of $1.98 when I first suggested that it is heading towards $2.75; a 37% increase about which many of you laughed. The stock now appears to be heading for new highs as it currently sits comfortably at $2.19, and (only) 25% short of my target. But this is only the beginning, and you should continue to circle $2.75 somewhere on your calendar; Just don’t ask me which day (yet).

Questions continue to come in the form of, why $2.75? The most important factor (in my opinion) was the drop in the bearish indicator - short interest from 317 to 292 million for a stunning 8%; something I never take very lightly. The last time Sirius saw such a drop in bearish sentiment was last August, when short interest dropped from 208 million to 184 million for an impressive 11.5%. I reminded investors that last year from the period of August 13th through November 30th Sirius saw its stock rise 37% from $1 to $1.37. I used this as a gauge, and thus projected something similar; and expected Sirius stock to approach $2.75 in a relatively “short period of time” – thus a 37% increase in its value.

Pre-earnings Run

The basis of what we know is as follows: The typical Sirius run up begins 8 to 14 trading days before reporting date for an average gain of 28%. The price typically peaks 2 days before reporting and then begins to fall the day before reporting and didn't stop for 4 days. This has been the working model with the exception of Q1. But as I said before, that anomaly is not enough to steer traders away from something that has worked so effectively over the course of the past two years.

I have made an assumption and circled August 2nd as the date for Q2 announcement. The truth is, the announcement can fall anywhere between the 2nd and the 10th. But for the sake of preparation, we continue to apply the August 2nd date which now puts us only 20 trading days towards the conference call. The stock recently broke firmly through what I previously said was the $2.10 resistance point. As we correctly predicted, it appears $2.25 is the next barrier; one that I now expect to break this coming week on its way to test $2.35 with an outside chance of testing $2.40. Once it does, the next point of resistance will likely be $2.44 and then $2.50.

While it may be easy to get ahead of ourselves here and wonder about all of the “what ifs” in August or what the rest of the year holds, Sirius investors will be better served to just focus on the month of July for now. We often tend to make mistakes by looking too far beyond what is really important. Take it one week at a time and look for positive 6 to 10 cent gains per week. This will put the stock right around $2.50 just before the Q2 conference call. The rest is up to Sirius to deliver, and I think the company will.

There will be many opportunities to lock in profits during the span and investors should not make the mistake and get greedy. There are many who were left holding while the stock retraced to $1.86 after reaching $2.44. Are you going to make the same foolish mistake again?

What to look for - 2.0 possibilities?

Better than expected auto sales is one way to get Sirius investors excited. The other method is to mention Sirius 2.0. I will be eager to hear what the company says about Sirius 2.0. Investors are salivating at its prospect and the possible impact on the stock. Its introduction to the marketplace will be key, as rumors have begun to spread about a potential earlier-than-expected launch. Mel Karmazin told investors that -- “our next generation of satellite radios are expected to offer significantly more choices for the consumer and contain functionality that does not exist today in our radios.”

The exciting new gadget, currently slated to be released by the 2011 holiday season, has investors salivating in anticipation of the “game changer” we frequently hear about. Sirius is banking on the device to expand on the platform's already broad content and offering enhanced interactive features.when describing Sirius 2.0, he says…

  • 2.0 promises increased content and functionality to our subscribers. We are expecting to expand our audio content lineup by a significant number of channels. That should make our already robust content offering even better. You should expect us to offer additional data service over time as well.
  • We are also planning some exciting improvements in functionality. An electronic program guide will be available that lets you know what's on all of our channels.
  • Our subscribers will be able to buy music from their radio. We'll also include pause, resume, and replay as well as record and playback capabilities.
  • We believe these improvements will enhance the customer experience and make our service that much more differentiated and superior to the alternatives out there and therefore, that much more indispensable to our subscribers.

Clearly, Sirius’ investors have reason to be excited about a product that can potentially be the “evolution of the brand”. While there continue to be some rumors regarding its possible early release. I believe that until a formal announcement is made, I have no reason to expect Sirius will divert from the previously announced 2.0 launch date. But as I have said many times, Sirius has had the uncanny ability to make many experts-- particularly those who feel they have a good grasp on the model-- appear foolish. The company will set you up to over deliver; that is to say, expect the unexpected.

Summary

Sirius expects to generate approximately $3 billion in revenue and $715 million in adjusted EBITDA for fiscal year 2011, while projecting free cash flow to now approach $350 million. From an operations standpoint, it is also projecting to add another 1.4 million net subscribers by the end of the year and to experience full-year conversion and self-paid churn rates, similar to that of 2010. This part of the operation continues to be a concern of mine as the company has shown little initiative towards improving these two important metrics.

As usual, these continue to be pretty “conservative” figures in my opinion. Sirius is notoriously cautious when it comes to guidance but even from a bearish perspective, these figures (if reached) will keep the company on the same course of growth as last year, if not slightly higher. This is why I expect guidance to be raised, and for the stock to respond with a price target of $2.75.



Disclosure: I am long SIRI.

Source: Sirius XM: What to Consider Ahead of Earnings