I just finished reading "Responding To A Hopeless Case Of Sirius XM Bullishness" by fellow contributor Rocco Pendola. I found it curious that he would accuse another Seeking Alpha contributor, Cameron Kaine, of being a hopeless SriusXM (SIRI) bull while ignoring my recent article "A Bullish Case For Sirius." Perhaps it is because I did not write an article that Pendola says "took me [Pendola] to task for my rather pessimistic view of the satellite radio provider's long-term future." Or perhaps it was because my case was more difficult to deconstruct. Regardless, I would like to go over some of the claims Pendola makes.
He begins by stating:
Like researchers who argue over the efficacy of the quantitative and qualitative methods, Kaine and I differ in the way we value stocks. I argue that Kaine falls closer to the quantitative side whereas I am more of a qualitative guy. That's no different than how I operated as an academic researcher, using both methods effectively, but favoring the interpretive, naturalistic approach.
After stating what kind of a qualitative analyst he is, he proceeds to bring up charts and statistics about listeners, platforms and revenue growth. He writes articles about chart patterns and resistance and support and using options activity as buy/sell indicators. I was taught that these are quantitative data when I was in school. But Pendola discounts what I learned in school while writing about how he operated as an academic researcher. Specifically, in an exchange of comments on the importance of free cash flow in another recent article, we exchanged the following when I wrote:
Discounted cash flow and IRR are the best ways to determine the value of investments. It's the way I learned how to do it in engineering school and the way I learned how to do it in business school. It was the way we did it in corporate America when I was asked to evaluate business opportunities, acquisitions and spinoffs. We can disagree on the risk, risk premium, future assumptions and discount factors, but to ignore the cash generated by a business is foolish.
"It was the way we did it." Red flag, right there.
Somehow, "the interpretive, naturalistic approach" Pendola learned in school is okay, but rigorous quantitative analysis learned in schools raises a "Red flag." Perhaps it was because I learned quantitative skills many years ago and things have changed -- you know, something to do with that new-math stuff. Perhaps it was because my MBA in finance was earned at Rutgers. Perhaps he thinks that Wall Street analysts all have it wrong and that only Pendola has seen the light.
More importantly, Pendola wrote:
Like statistical research, you can twist data and use sentiment any way you like to make your case. As such, I guess it all depends which part of the company's performance you're looking at. I like to look at revenue growth, which came in at just 6% for Sirius XM in Q2. The company's guidance for Q3, which fell short of consensus estimates, puts growth at a relatively tepid 10%.
Pendola knows that the company has been hampered by a price freeze imposed by the FCC and that makes Sirius's growth somewhat more impressive. He also failed to note, perhaps an oversight or perhaps simply to "twist data," that the company actually had to implement a price cut on their MRF from $1.98/month to $1.40/month in December of 2010. These two factors help make the 6% growth more impressive.
Pendola states how you can twist data, and then does exactly that. Since when is 6% growth in a low-interest-rate environment bearish? And when has 10% revenue growth in a low-inflation environment ever been considered "tepid?" Most companies would kill for that kind of growth.
Bulls and bears disagree all the time. It's why stock prices change. Investing is all about selecting companies and deciding if their share prices reflect true value. The bulls will look at the FCF generated by Sirius and see it growing dramatically. The bulls will look at its dominant (yes, Rocco, dominant) position in new car dashboards and see opportunity. The bulls will look at the used car deals and see an opportunity to incrementally grow revenue. The bulls will look at the price increase coming in 2012. The bulls will look at 2.0 and see an opportunity to address the Hispanic market and new features, functionality and revenue opportunities.
Certainly, there is a bear case. Sirius does carry a lot of debt. It faces competition, and much of that competition is free or cheaper than a Sirius subscription. John Malone's Liberty owns 40% of Sirius.
But is that any reason to use an inflammatory title calling bulls "hopeless?" Pendola writes:
If a company is not aggressively going for the throat against those types of innovators and is willing to ride its subscription model to 6%-10% revenue growth, I want no part of it as an investment. And other than traders who will continue to pass Sirius XM stock around like an insecure high school cheerleader, serious investors will not want a part of it either.
Why bother with a stock such as SIRI when you have so many other hyper-growth options gobbling up meaningful consumer and ad market share at a rapid pace in and out of the audio entertainment sector?
I find Pendola incredibly insulting to high school cheerleaders and serious investors alike. He can choose to remain bearish and seek other opportunities with growth rates above 10%. I, like many other investors, will be happy to have the 6-10% revenue growth. A top-line growth rate that will have far greater than a 6-10% impact on the bottom line and will reward patient investors.
And, for the record, I am bullish on Sirius and believe the $3.3 billion revenue projection for 2012 will be exceeded.