If you were a teen growing up in the 80s and saw the movie “Better off Dead,” then you remember the famous line where Lane Myer says to the paperboy who came to collect his fee: “sorry, I don’t have a dime”; to which the paperboy responded, “I didn’t ask for a dime. Two dollars.”
This coming earnings quarter, Sirius XM (SIRI) investors will be asking Mel Karmazin for just 25 cents. And I think he should oblige. He can do it, and he’s got the power to do it. But will he?
Sirius investors were a bit disappointed as the stock closed down 1 penny. It’s remarkable what a difference a week makes. After the stock reached $1.86 several weeks ago, losing a penny in one session would have been considered a “win”. But since hitting the $1.86 low and then climbing to as high as $2.25 for a 21% gain, I think this a raised investor expectations considerably; and understandably so.
From a momentum perspective, investors believe the stock should continue to go up. Why wouldn’t they? But the truth is, that is just not possible. I have received questions from commentors wondering, “What does it mean for Sirius that it closed below the open Tuesday”? This is a fair question. As disappointing as it would appear, it really doesn’t mean anything. Stocks sometimes need to pause; it is as simple as that. Instead, I encourage Sirius investors and traders to continue to expand the picture (or trading range) and really appreciate what the stock has done. It opened last week at $1.97; I think many continue to overlook this fact.
Instead, investors should evaluate the performance of the stock with a “one-week-at-a-time” approach; this is the only way to maintain both your sanity and capital. What we want to see is a positive net gain for the week and focus less on the day-to-day action. Only profit taking has kept the stock from maintaining $2.25, a level it has tested several times. Until I see evidence to indicate that I should change my opinion, $2.75 is still the goal, and by my count, the stock is ahead of schedule. Sirius is still a buy at this level as there still remains 25% premium to the upside.
Investors should be reminded of what lies ahead over the next 18 days and counting. August 2nd remains the earnings target until Sirius confirms or says otherwise. 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 doesn't stop for 4 days. So this means next Monday the 11th the stock should at least pass the $2.35 target (if not sooner) because it puts Sirius right at the 14-day benchmark. From there, $2.50 will be right around the corner.
What to look for
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, they are 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 them 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.
On June 27th, Thomson Reuters upgraded shares of Sirius from "negative" to "neutral." This arrived immediately after an upgrade by Janco Partners from accumulate to buy as they raised their target from $2.15 to $2.50. Don’t overlook why these upgrades were issued; particularly since Sirius was trading below $2 both times. The reason is, both of these analysts are familiar with Sirius’ pre-earnings run. It was a “no-brainer”. It also helped that Seeking Alpha contributor Spencer Osborne offered a deeper look at Sirius’ used car deal with General Motors (GM). Sirius announced a deal that effectively changed the whole dynamic going forward, in which it offers the company a second chance at getting idle radios activated. The CPO deals gave consumers a three month promotional subscription. According to Spencer, the problem has been that dealerships are more worried about the sale than letting consumers know about the promotion. What transpired is that consumers were oft not even aware that their satellite radio was active.
I cannot emphasize enough the importance of Mel Karmazin raising guidance here. I have placed 25 cents in his hands, and one that he can share with investors by doing what I have advised him to do. Many analysts (including myself) have placed a $2.50 price target on the stock. If Sirius raises guidance to the degree where it should be, the stock will see $2.75. If Mel karmazin raises projected FCF by an additional 25 million to $375 and/or increase net subscriber from 1.4 to 1.6, and let’s just say he utters the words “stock buyback” once more, it is then possible to say $2.75 is the “minimum” range. Either way, he’s got 25 cents to give, and the stock remains a huge buy right here.
Disclosure: I am long SIRI.