Sirius XM's (SIRI) stock has been on fire of late for what I can only describe as investor exuberance over the anticipated acquisition by Liberty Media (LMCA). While the talk of the acquisition is nothing new, things have heighten a bit recently when Liberty first filed paper work with the FCC to request de facto control over the company's licenses. Since then the stock has surged from $2.20 last Thursday to as high as $2.41.
I'm not going to bore you with the details of government involvement because nobody really knows what the outcome will be. Because regardless of what may be the outcome from these discussions and filings, the fact of the matter remains, Sirius XM must still perform as a company as it is heading toward its Q1 earnings announcement.
These developments won't change the fact that what is going to move its stock price is its ability to execute. The question everyone wants to know is where is the stock heading? On a recent article, I argued why I thought that it was not going much higher than $2.50 by stating the following:
"For Sirius, in 2012 and beyond, or post recessionary events, earnings and expectations are going to impact valuations unlike never before. Sirius has to be willing to innovate and inspire. Right now it is unable to do that because, as I've stated, it is "stuck in auto" or it is still heavily too reliant on the automobile. I have said recently that $2.50 seems like it is the cap on the stock and I don't see a scenario where it can go higher especially considering that the market (for a while) has anticipated Liberty making an offer for only that amount."
Another reason that $2.50 has now become a number that is focused upon is because when Mel Karmazin recently appeared on Jim Cramer's show he was asked ask about how Liberty was being rumored to be targeting Sirius for $2.50 and there wasn't much contest in Mel's response. Cramer's exact words from the transcript of the conversation were as follows:
You're one of the smartest guys in the world, the 40% shareholder in Liberty, why shouldn't they now that it's gone away (restrictions) start buying and buy the rest of the company for $2.50 which is capping all of the return that you can give shareholders. Liberty Media is free to do anything they want. You can't tell them what to do.
To me, I took that as a sign that not only was Cramer possibly right, but it was also the fact that the $2.50 number has been thrown around and attached to Liberty for almost two years. So my question is why would an investor be willing to pay more than $2.50 for the stock at this point when the entire market seems to know that this is the cap? Particularly for a stock that is already considered expensive. It just doesn't make sense. This is likely why the stock was downgraded to neutral from a buy rating yesterday by David Joyce of Miller Tabak.
Also, while the acquisition topic remains hot, it seems the stock has cooled off today after closing at $2.33 or 3% down from Monday's close of $2.40. Part of the decline has to do with a report from Canaccord Genuity analyst Thomas Eagan who noted that Liberty can monetize its stake without buying more shares and doubted Liberty would pay $1.5 billion for an additional 10% stake after paying $530 million for 40%. Thomas also said that he believes that a Liberty spin-out of its 40% SIRI stake would help monetize the investment.
I have to agree, from a pure business move, this would likely be the ideal option for Liberty instead of overspending for the stock at current levels. The question is why would Liberty want to spend that amount of money when the option of cashing out exists? This is certainly something to consider amid all of the chatter. But as investors, I think the focus has to be back on the company's execution and ways that it can be a self-sustaining entity. I think we have become too consumed with wanting to be bailed out. What should we expect for the Q1 earnings result?
The company mentioned during its Q4 full year 2011 report that it expected churn to increase "modestly" this year to 2.1%. But it did also recently sign some deal with pre-owned auto dealers so perhaps there will be some offsetting metrics in terms of subscribers. For this reason, I don't expect it to increase its guidance as many are predicting. But I do expect a few more surprises between now and the announcement.