SiriusXM Radio (SIRI) share prices continue to defy logic. On Friday it was reported that Lazard Capital reduced its target price for Sirius to $2.70 from $2.90, and instead of the share price falling, it rose. One reason given for the change was that the "new contract with GM will diminish GM promotional subs from Sirius XM's sub count by 2013′s Q4," although Lazard maintained its buy rating on Sirius.
On May 8th, Liberty Media (LMCA) announced that it had entered a forward contract to purchase 302 million shares at approximately $2.15 per share. That day the shares opened at $2.24, traded as high as $2.25, as low as $2.07 and closed at $2.14. Later that week, Liberty filed a 13D stating that it had purchased an additional 60.35 million shares at approximately $2.13 per share. The shares closed that week at $2.13, and haven't closed above $2.00 since May 14th.
Liberty now controls more than 41% Sirius. The Liberty chairman, John Malone, and its CEO, Greg Maffei, are directors that sit on the Sirius board. Instead of the market agreeing with these Sirius insiders who see value in the shares at $2.13-$2.15, it has chosen to view the potential acquisition by Liberty as negative.
More than three years ago Liberty acquired preferred shares from Sirius for $12,500 that are convertible into 40% of the company as part of an investment agreement that included a $540 million loan that Sirius desperately needed to avert bankruptcy. Since then, the loan was paid back and Liberty has bided its time waiting for the standstill restrictions in the agreement to expire. In anticipation of the expiration of that agreement this past March, Liberty was making plans to gain control of Sirius.
These plans included the forward purchase contract entered into in December of last year and filings with the FCC to gain de facto control of the Sirius licenses. In the meantime, Sirius has continued to grow its business and reduce debt.
Good News on Car Sales
There will be many stories for Sirius investors to keep track of as the Summer begins. The first will be June auto sales. J. D. Power and LMC Automotive wrote:
June retail sales are expected to reach 994,800 units, a 15-percent increase from June 2011 and the second-highest sales rate during the past 12 months. The total sales rate, including fleet purchases, is expected to reach 1,265,000 units in June.
Strong new vehicle sales are a key driver for Sirius subscriber growth, and the LMC current forecast of 14.5 million light vehicle sales for the year is higher than the consensus 14.3 million that motivated Sirius to increase guidance for subscriber net additions by 200,000 to 1.5 million when Q1 results were released. On the May 1st conference call, SiriusXM CEO Mel Karmazin stated:
The consensus expectation for full year 2012 auto sales has climbed to about 14.3 million today from 13.7 million when we gave our initial guidance in February. This provides nice momentum for our growth this year, and we are also benefiting from our efforts in the used-car market. ...In February, we told investors that our subscriber guidance was conservative and -- but for the uncertainty around the price increase, the forecast would have been higher. While we still have a lot of work to do implementing this price increase and retaining subscribers as we compete against free terrestrial and free online competitors, this strong first quarter performance has made us comfortable in raising our full year net addition guidance from 1.3 million to 1.5 million.
LMC noted the concerns about the macro-economic environment and a potential slowdown over the summer, but still expects strong sales for the rest of the year. If LMC is correct, Karmazin's 1.5 million net adds are probably still conservative. And if Karmazin was willing to state he felt "comfortable" raising guidance to 1.5 million, investors can be certain that he is still being "conservative."
As the Summer Unfolds
There will be three key events in mid-July and early August. Liberty will settle its forward purchase agreement on July 11th, and investors and the market will find out if Liberty is committed to its acquisition of Sirius or if Liberty elects for a cash settlement rather than taking possession of the shares. Then, both Liberty and Sirius will release second quarter results and hold their conference calls in August, most likely during the first 10 days of the month.
Sirius results should again be solid. There is a good chance that the company will again increase subscriber guidance based on the continued strong US auto sales. Investors are also likely to find that the actual performance of the company will take a back seat to the ongoing maneuvering between Liberty and Sirius to gain/retain control of the FCC licenses. The analysts on the Sirius conference call will almost certainly be looking for more insight into the Sirius "discussions with Liberty Media to explore possible transactions with respect to its ownership interest in Sirius" that Sirius disclosed in its May 31st 8K.
In addition, there are filings with the FCC that need to be addressed. Liberty filed a Petition for Reconsideration of Dismissal and Sirius filed a response. The FCC will eventually need to render a decision on whether to grant Liberty de facto control or require Liberty to take additional steps before reaching a final decision. Such a decision could take place at any time.
Is it a good time to go long in Sirius?
On the one hand investors have the market telling them that Liberty overpaid for shares of Sirius when it agreed to pay $2.15 on its forward purchase contract, or when it paid $128 million, approximately $2.13/share for 60.35 million shares. On the other hand, one has the analyst consensus price target of $2.57-$2.60 per share, with a low of $2 and a high of $3.20. Even Lazard's recent reduction of its target price to $2.70 is still 43% above the Friday closing price.
An investor taking their lead from Liberty (the insider willing to pay $2.15) or the analysts (all with price targets above the current price) would be going long. A cautious investor would look at the share price and think the consensus wisdom of the market sees risk since it refuses to let the shares rise above $2. An individual investor looking at subscribers, revenue, earnings and cash flow all continuing to rise can apply their own set of criteria and see an undervalued, fairly valued or overvalued stock.
In a prior article I suggested that investors looking to limit risk at the expense of potential gains use a covered call strategy. That strategy still has the potential for a return of more than 17% in just seven months. Other investors may choose to simply follow the advice and price targets of the analysts or the actions of Liberty and go long.
As an investor with a long position in Sirius, I agree with Liberty and the analysts and see value in Sirius share prices at these levels.
Disclosure: I am long SIRI.
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 have made similar covered call trades to those discussed and may initiate (or close) a buy stock/sell option position in Sirius, at any time. I have no positions, or any plans to open positions in the next 72 hours, in any of the other companies mentioned in this article.