Sirius XM, Level 3: Investing in 'Hope' Is a Recipe for Disaster

Includes: LVLT, SIRI
by: Richard Saintvilus

Over the past couple of weeks I have done my best to continue to offer Sirius XM (NASDAQ:SIRI) and Level 3 (NASDAQ:LVLT) investors “glimmers of hope when many began to deal with either clear cases of regret or confusion. Now “hope” does not sound like a horrific idea, but is this how we (as investors) want to move forward with our retirements, our college educations, home savings, etc.; the various reasons we became investors? Do we want to make decisions relying solely on “hope?”

While it can be argued that “hope” (from any psychological perspective) is a tremendous component to have, not only in our investments, but also in our lives, it also lends the implication of being uninformed. My friends always tell me, “Cam, you gotta have faith”; just like that George Michael song. Indeed, it was a nice song and the idea of “faith and hope” presents a very nice fundamental quality, but to translate it to our investments; it’s a recipe for disaster.

Many will tell you that “faith” is defined as the substance of things “hoped” for, and the evidence of things unseen. No matter how you chose to define it, there is nothing I find more challenging than to rely on fate or faith or hope. I have to have faith that the plane that takes me from Miami International to Laguardia will stay in the sky; there is nothing more brutal in my life than those 2 and half hours, but I get through it. But when it comes to my investments, I throw all of these out of the window.

Over the past couple of weeks Sirius investors have seen their resolve or “faith” tested by watching the stock decline from its highs above $2.00 to a low of $1.63. More of these types of tests were in play on Thursday as the stock dropped below $1.80 after being well above $1.90 for several sessions. This has generated not only more debates, but has also increased investor frustration over the direction of the company and to a lesser extent; our economy. This is where “faith” gets dangerous and why it lends the notion of being uninformed. Because if one has information, then “faith” by its definition is not needed.

Information trumps faith

I always quote Warren Buffett and one of my favorites is the idea that “when a company does well, the stock price will follow.” This is very fundamental and makes perfect sense. Upon Sirius’ recent earnings report, I think investors can agree that it is more than clear that Sirius is doing more than “pretty well”. But that has not stopped investors from expressing much frustration over the performance of the stock. Clearly, Sirius remains a buy, and I think investors should distinguish between the company and the stock. Its management has given investors all of the information.

Not only did Sirius report revenues of $744 million, the company also impressed by reporting a bottom line number of 3 cents per share. Sirius rewarded investors with increased guidance:

"With the excellent subscriber performance recorded in the first half of 2011, we are now confident that we will exceed our previously announced 1.4 million net subscriber addition guidance for 2011. Today we are raising our full-year guidance to a projected 1.6 million net subscriber additions," added Karmazin. "After a strong first half, we now expect free cash flow in 2011 will approach $400 million, up from our prior guidance of approaching $350 million."

In 2011, the company continues to expect full-year revenue of approximately $3 billion. Sirius XM's adjusted EBITDA projection remains at approximately $715 million. Full year self-pay churn and conversion rates for 2011 should be broadly similar to those seen in 2010.

In Level 3’s case, investors were a bit disappointed upon learning that the company reported a loss of $181 million, or 11 cents a share. This was compared to only a loss of $169 million, or 10 cents a share in the year-ago period. Level 3 recorded revenue of $932 million, an impressive figure which was 2.6% higher than the same period last year. On a continuing basis, excluding a charge of $23 million on debt extinguishment and $14 million in Global Crossing (NASDAQ:GLBC) costs; net loss was 9 cents a share.

There were also many highlights about which to cheer. The company reported continued core network services revenue growth as well as consolidated revenue of $932 million. Its network services revenue growth; 2 percent sequentially and 6 percent year-over-year while consolidated adjusted EBITDA increased to $226 million, or $234 million excluding costs associated with the Global Crossing transaction. With these types of information, who needs faith?

While the information above shows clear evidence of two growing and thriving companies, investors can often make the mistake of misguiding their faith in our struggling economy with that of the companies themselves. That is to say, they will often sell the stock at a loss instead of being greedy due to their lack of faith that the jobs report will get better, or our economy will not enter another recession.


It’s hard for investors to not be nervous in the wake of market declines, but what is often lacking is a sense of context and perspective; particularly when investors turn on the news and hear that one of the major indexes have dropped 500 points. This is where information is more important than faith; being well informed about the performance of the companies in which one has taken an equity position will serve to avoid the noise that is often generated where only faith and hope is required. In the case of Sirius and Level 3, the information is clear that these stocks will perform well into the future, even though faith in our country's economic status may be lacking. Investors should not make the mistake and link the two; it would be a recipe for disaster.

Disclosure: I am long SIRI, LVLT.