What follows is an open letter to Rocco Pendola, a prolific contributor on Seeking Alpha with a decidedly bearish view of the stock of SiriusXM (SIRI).
Dear Rocco,
Although you and I have decidedly different views on the performance of the stock price of Sirius, I never fail to read your Seeking Alpha Focus Articles on the company. I expect to see the inevitable comparisons to Apple (AAPL) or Pandora (P) along with a litany of all the things wrong with Sirius compared to the greatness at Apple and Pandora and the reasons why Sirius will inevitably fail. I also expect to see you besieged with over the top personal attacks and irrelevant criticisms in the comments section by Sirius longs that feel insulted, the occasional supporter, the occasional relevant comment and some amusing one-liners. I also expect to disagree with the basic premise of your article and I am rarely disappointed.
So when I opened your latest article titled "Here's What The Sirius XM Board Should Say To Mel Karmazin" I expected to read that they hired Donald Trump to say "You're fired!" Instead I found myself reading an excerpt from a recent interview of Mel Karmazin by Jim Cramer on Mad Money. Mel had once again disclosed that he wanted to use the cash that Sirius was building up for a share repurchase program, stating "I don't know what to do with it other than to use it as you're characterizing." You zeroed in on the statement, calling it "one of the most asinine statements you've ever heard in your life."
Anyone that follows politics in this country for more than ten minutes is certainly able to come up with many, many statements that are far more asinine, and from the mouths of leaders that will have far greater influence on our daily lives. But I digress, probably because I am reluctant to admit that I found myself agreeing with your basic premise. I also think a share buyback is not the best use of the pile of cash Sirius has been building up. Last August I wrote :
From my perspective as an investor, I would rather not see a buyback. I have other preferences.
- I would prefer the company use the cash to pay down debt.
- I would prefer to see accretive acquisitions.
- I would prefer to see the company reinvest in the business, whether it is enhanced product, enhanced content or better Sales and Marketing.
- I would prefer to see a dividend indicating the company expects to have consistent earnings to maintain and grow payments to shareholders
These are preferences similar to those you wrote about: "If he does not answer these questions with answers that include words like "growth" and "reinvest" and "return on investment," the board needs to promptly show him the door."
The point is that I agree with the silliness of stating that the buyback has to be Number 1. But I haven't turned completely to the dark side. I don't see raiding visionaries from the companies where you have chosen to invest as the best solution. Sirius has more pressing needs that should be addressed before they begin worrying about putting visionaries with great ideas into a room someplace.
Sirius needs to finish a fully implemented 2.0 and get support from the OEMs to get some version of it into cars. They need to get to a great "me too" product for the Internet and smartphones first. They need to promote the product and not the free cash flow. They need to learn to walk before they can run off into the future.
As to those visionaries with great ideas, Sirius management can begin to look in their own company where they are likely to get all the ideas they can use, if they only choose to listen. Many companies just fail to listen to the ideas of their own employees. If management wants an outside perspective, they have many outstanding business schools in their back yard... business schools that are constantly looking for opportunities to expose their students to real world problems. They can get all the bright ideas they want for free by making themselves available for classes and students to run case studies.
The liquidity crisis that threatened Sirius three years ago is behind it and the company is no longer in survival mode. It has a lot going for it today - content, OEM relationships, loyal subscribers. With the company projecting $1.5 billion in cash by year end 2012, it finally has the cash to address its many current shortcomings. 2012 could well be a pivotal year.
Where you see a disaster, I still see a company that has the potential to be trading higher 2 years from now than it is today.
Regards,
Crunching Numbers
Additional disclosure: I am long SIRI. I have $3 January 2013 covered calls against most of my Sirius position, as well as some $2 and $2.50 January 2013 covered calls. I may initiate (or close) a buy stock/sell option position in Sirius, discussed in another article, at any time.
