My purchase point was $2.24 shortly after 10 AM Monday morning, and my reasoning is simple. I expect earnings to be over and above street estimates, and to enough of a degree to facilitate a move higher in Sirius XM's share price.
I do not wish to get into the details of estimations posed by Spencer Osborne in his article here. I feel he does a reasonably good job of it, so be sure to check out his article if you are seeking a well thought out piece. I do feel his numbers are a bit conservative, though, and I am expecting a bit higher in two main areas which should drive most additional metrics into the "better" category as well.
Borrowing from Spencer's article, the numbers for street estimates in the upcoming call are as follows :
Sirius XM -- 2012 Guidance
- Subscribers of 1.3 million net additions, with a year-end total of 23.2 million
- Churn rate of 2.1%
- Approximately $875 million adjusted EBITDA
- Revenue of approximately $3.3 billion
- Free cash flow of approximately $700 million
I'd like to touch on the two figures which I feel will both be handily beat, and which should set the stage for the coming year in terms of expectations and revised guidance.
First, I expect churn to come in just a bit higher than last quarter's 1.9%. I just do not see the price increase having that much of an effect on user cancellations. What amounts to around $1.50 per month should be barely noticeable for most people. Over a single year, it's the cost of one lunch. I honestly feel that for most satellite radio subscribers it's unlikely that they are just scraping by, as if you are there is no sensible reason to pay for radio in the first place, and such a minor increase won't cause much of a second look. I'd guess most people don't even realize there's been much of an increase at all. Sirius XM is also rather aggressive in retaining subscribers, and those who call to cancel are likely offered attractive rates to remain with the service. Even for those that do cancel, Sirius XM wants you back, and makes it clear that they do.
I expect guidance to be raised due to a lower churn. Sirius XM guided conservatively at 1.3 million subscriber adds, and a decrease in churn can and will support a larger end of year number.
1.3 million yearly additions translates into 325,000 additions per quarter. I expect this number to be soundly beaten. 425,000 additions would be my low estimate, but I would not be surprised to see 450,000 additions or more. My reasons for this include lower than expected churn as stated above, strong auto sales this year, as well as impact from retail sales of the Lynx and Edge radios offering Satellite Radio 2.0 as well as channels which cater to the Hispanic market.
I believe the impact of the Lynx and Edge radios are being glossed over and that they should not be ignored. I know at least two people who held off on buying a satellite radio until these radios were made available. While the vast majority of buyers were likely current retail subscribers, I believe a significant enough number are from new customers which should boost the subscriber additions nicely.
Subscribers drive revenue, and while there are other metrics at play here, my focus is primarily on those two numbers above; churn and subscriber additions. I also believe the price increase will reasonably offset any negatives on ARPU due to retention efforts, so look for ARPU to improve as well.
With my purchase of Sirius XM at $2.24 to round out my position, I'm comfortable sleeping and waking up in eager anticipation of the first quarter conference call. I'll be looking for at least a meet of street expectations, but would obviously prefer my more bullish estimations (or better) to be what is reported. If Sirius XM surprises to the upside with what I am expecting, I see no reason to not start the trek back up to the previous trend. This places us between $2.50 and $3, with the median at $2.75 which is my current fair value target.
If news merely meets company guidance, which they stated was conservative, I will not hesitate to pull the plug and exit my position completely. I don't think Sirius XM can afford to not beat its own guidance, and I don't think the street would react favorably to a simple "meet" either. As always, investors must be prepared for anything and everything, and that means a possible downside as well.
I'm looking forward to the morning of May 1st.
Additional disclosure: I am long SIRI May and June $2 calls.