Sirius XM: Liberty Better Move Quickly

Includes: LMCA, SIRI
by: Stephen Faulkner

If Liberty Media (LMCA) wishes to acquire an additional 10% of Sirius XM (SIRI) it is my opinion they should do this sooner rather than later.

With the filings on Thursday by Liberty Media in rebuttal to Sirius XM's petition to dismiss or deny their request for 'de facto' control of Sirius XM's licenses, things look to be moving along with urgency. This urgency makes perfect sense as I will detail in a moment. Before I do, it is best that you bring yourself up to speed on these FCC filings by visiting the link above, and also by visiting Spencer Osborne's article covering the most recent developments on the subject.

In reading the comments within his article and others which cover the topic of Liberty Media seeking control of Sirius XM, I can't help but notice that there are two camps of people.

On one hand there are those who are almost hostile towards Liberty Media, and feel that Liberty needs to "pay up!" for Sirius XM shares they hold which they feel are undervalued. I believe this has some merit, as my current price target for Sirius XM is $2.75, and if there were a tender offer for shares today, I feel this price point would be "fair" based on my perception of Sirius XM's value right now. My basis for this? February guidance by Mel Karmazin per their conference call, and my own expectations for Sirius XM moving forward in the short term.

On the other hand, there are those who are more welcoming of a Liberty tender offer and resulting control. This camp likely feels that this is inevitable, and was set in motion some time ago. I also believe this camp has merit. Regardless of the fact that Liberty basically got 40% of Sirius XM for nothing, they did bail investors at the time out. The options were bankruptcy or Liberty, and that's it. Investors were like the starving and parched man who just survived 2 days in the desert without food or water. That man would sign away the deed to his house for a glass of water, rather than die, and that's what happened with Liberty's water and Sirius XM on its death bed.

I agree with both camps to some extent, and I think I offer a reasonable view here. We're at the 3 year mark, the cuffs are off, and what Liberty needs to pay is current fair market value. We knew as investors this day was coming since March 2009. We should have expected that once the cuffs were off that Liberty would not be paying what Sirius XM would be worth in 5 or 10 years more, but rather what Sirius XM was worth at the time. Current pricing? $2.20 give or take 5 cents. If Liberty were to tender today for a small premium? They may get what they need for $2.50. This is getting Sirius XM on the cheap.

But it is my opinion that Liberty absolutely must move quickly if they wish to get such pricing, and by moving on this as soon as possible with the FCC it shows they are aware of this. There are two things going on here independent of Liberty which I feel will return this stock to what I consider "fair range" today around $2.75, and may even overshoot that number.

First, we have the first quarter conference call which due on May 1st. Expectations are high for this call by many, due to excellent auto sales so far this year (the main source of Sirius XM subscribers) as well as a price increase hitting the bottom line for the first time. Churn and subscriber additions were conservatively guided to a worst case scenario, I believe, and we may find that churn actually comes in better than expected, and subscribers increase at a better than guided rate. Beyond this, the used market is expanding and should bolster these numbers as well. These are four things I am expecting to drive a blowout first quarter call.

Something else that should be watched is what appears to be an absolute textbook cup and handle chart pattern. While, in my opinion, technical analysis should not solely be relied upon, it can be used in conjunction with other data. When you consider the upcoming conference call above, you have a perfect storm brewing for Sirius XM that could send the share price up in rapid fashion on solid good news. This is why I believe Liberty needs to move sooner rather than later, in order to get the best pricing possible.

Consider the following charts. The first shows the cup and handle formation, which you can read about here. Tips of each end of the cup are at $2.35, marking strong resistance which we have seen. The handle is drawn with the red lines, and the original trend line for Sirius XM is shown in green. Notice the $2.75. This price point is not only what I expect based upon Sirius XM's stated numbers, but also confirmed by the chart as well. Fundamental and technical analysis matching up makes me feel very good about owning shares of Sirius XM.

The next chart is a zoom in on the handle. Something very important to consider is how quickly the share price shot up as soon as news came out about Liberty Media's petition to the FCC right at the end of April. Why is this important? Because it's all it took to send shares running up. One petition, 10% appreciation. But this itself is an anomaly and since it was not concrete news of an actual offer, or news of subscriber guidance increase or a blowout quarter, it returned to its pattern in short order with dwindling volume on the way down towards $2.20 and possibly even a dip under that for a short time near the end. Overall market correction, in my opinion, accelerated this movement.

We are 2 weeks away from the first quarter conference call on May 1st. Investors need to be aware of both fundamental and technical analysis, and need to make their decisions based upon all information at hand. Liberty Media must also consider these things, and understand that a move sooner, rather than later, appears to be the most prudent.

In my opinion, Liberty has two weeks to get this rock bottom price. If they wait too long, they could find Sirius XM back up to $2.75 a share and returned to its previous trend based upon their respectably strong performance and fundamentals. Moving too slow could cost them a couple hundred million extra. Because of this, I believe investors should watch for continuing developments and a sense of urgency on Liberty's part with regards to the FCC over the next two weeks.

Near $2.20 and under presents an excellent buy point, though caution should be exercised with the overall market in correction for a possible break through and a run south on an exceptionally poor macro environment.

Disclosure: I am long SIRI, LMCA.

Additional disclosure: I am long SIRI April, May, and June $2 calls.