Sirius XM May Recognize $3.4 Billion-Plus In Q2 2012

| About: Sirius XM (SIRI)

While this may be old news to some, I feel it bears repeating given that Sirius XM (SIRI) is due to report Q2 earnings in the next few weeks. The news? Sirius XM may enter $3.4 billion worth of net operating losses (NOLs) in Q2 earnings for 2012.

From the 10Q filing :

As part of our continuing assessment of the recoverability of our deferred tax assets, we consider the impact of future forecasted taxable income. Depending on our continued positive performance in the second quarter of 2012, together with the emergence from cumulative losses in recent years, as well as projections of sufficient and sustainable taxable income, we may recognize the benefits of all or a significant portion of our net deferred tax assets in the second quarter of 2012 through a reduction of the valuation allowance. This would result in an income tax benefit that would materially and favorably affect net income and stockholders' equity in the period of the reduction. As of December 31, 2011, we had approximately $3,400 million of valuation allowances established against the deferred tax assets.

Is this a gem that some have made it out to be?

This does not mean that Sirius XM suddenly receives $3.4 billion. This money, the NOLs, have long been a topic of discussion and have been factored into Sirius XM's share price for a considerable amount of time. This accounting write allows them to move the NOLs from a "maybe" or intangible asset, to a tangible asset. What this means is they would now be able to place this $3.4 billion positive on the balance sheet, increasing assets, and making the company worth more on paper.

In theory this should translate into a higher share price. By taking $3.4 billion from an uncertainty to a certainty, and putting it down on paper, holds value in two ways. First, as stated above it takes an intangible and moves it to tangible. This has an "A bird in the hand is worth two in the bush" sort of effect. It's a signature of validation that goes straight to the balance sheet. "Signed, sealed, delivered" holds more value than "in transit."

Second, this provides a psychological boost when the numbers are reported in the second quarter filings for investors. This is a massive jump for tangible assets and makes the company worth more on paper. Such things have a tendency to create higher share prices even if they are short term blips on the radar.

If Sirius XM were to proceed with this accounting write, the increase in share price would make it more expensive for Liberty (LMCA) to acquire a controlling stake of 51% in the company. As I have stated many times in the past, I truly feel it is in Liberty's best interest to move sooner rather than later in order to acquire at least 51% at the lowest price possible. This is especially so if one expects the FCC to return a "no" to their request for de facto control and requires them to move to de jure control. While the jury is still out on this, Liberty may wish to consider securing additional shares either through open market purchase or with a second forward contract to lock in today, what appears to be lower pricing than is on the horizon. "Waiting" may result in Sirius XM being a bit more expensive in the future, costing Liberty more if they are required to purchase more shares by the FCC.

The clock is still ticking. Sirius XM is slowly and steadily improving. With the ability to make a $3.4 billion accounting write, the "risk" of Sirius XM shares making respectable appreciation is high. Because of this, the clock ticks for Liberty as well.

What this all means for investors like myself, I believe, is that current pricing is a bargain. I still have a $2.75 target for Sirius XM, and I view these current prices as a steal for investors, and a steal for Liberty. While I don't expect an accounting write to "skyrocket" the price, I do expect it to have good positive effect.

Disclosure: I am long SIRI, LMCA.