Recently analysts have raised their expectations on the future income of Sirius XM (SIRI). I wrote about it in my last article which was met with a lot of excitement from investors. However, there were a few people who think the new earnings numbers do not take into consideration the costs of (1) retiring the $186 million in debt in September, and (2) the new costs associated with the $400 million in bonds just issued. Because of this, they think that the analysts are wrong about Q3. However Spencer Osborne thinks that these additional costs will be offset by the future gains from the lower interest rates:
Essentially, the debt issues at hand are $186 million of debt at 9.75% and $681 million of debt at 13% for a total of $867 million. SiriusXM is using refinancing and cash to handle this debt. Suddenly $867 million in debt at high interest becomes $400 million of debt at low interest! The annual savings on the $186 million should be in the neighborhood of $36 million. The savings on the $681 million should be about another $35 million. Put another way, these issues were carrying an annual cost of about $108 million. Now the annual cost will be at about $21 million (bear in mind the 13% notes were due next year).
This is a substantial difference that will carry a very positive impact on SiriusXM's financials. Investors should note that in order to retire the debt that premiums must be paid, as well as accrued interest. These one-time costs will impact earnings to the down side, but the subsequent quarters will see substantial positives in earnings.
I agree, and as I was writing individual comments concerning this issue, I realized that there are a lot of other investors that may have not heard the latest news, or might want more of an explanation of these new numbers. So I decided to write this article addressing the comments, and share my findings with everyone. Here are those new "controversial" EPS expectations (that were in my article), according to Yahoo Finance:
|Earnings Est||Current Qtr.|
|No. of Analysts||12.00||12.00||10.00||11.00|
|Year Ago EPS||0.02||0.01||0.07||0.55|
And in the article I wrote the following:
The earnings per share is expected to jump up 50%, from two cents a share to three for Q3. And Q4 EPS is expected to double from one cent a share to two cents. I have every reason to think that these results are not only doable, but may actually be a little low. I think the higher estimates are more in line with the current sub growth, which I expect to hit 2 million net additions for 2012.
The average estimates would be a total of five cents per share for the next two quarters, versus three cents a share (total for the two quarters) a year ago. The high estimate would be a total of six cents for Q3 and Q4 which I believe is more in line with 2 million net sub additions for this year. And keep in mind that the 3 cents for Q3 is actually the average AND the high number. But I received this comment, from Crunching Numbers after he read the article, and some of the other comments:
"What do you think the debt cost will be? CN said 100 million-- is that what YOU think?"
And, what do you think it will be? Instead of quoting analyst's old data and just stating that you "have every reason to think that these results are not only doable, but may actually be a little low. " ... why not go through the exercise of trying to model the business and share the results. Take the time to look at the debt. Take the time to look at subscription models and how slowly the revenue actually grows. This is not a business where revenue suddenly spikes higher or costs suddenly plunge.
As to 20% and bear markets... How many bear markets has Sirius had in the past couple of years? Without Liberty propping up the price by buying half a billion shares and essentially taking them out of the float this year, where do you think the price would be? And if Liberty stops buying, what holds the price up?
Worry a lot less about short squeezes and more about fundamentals and what will actually drive the price to reflect real value.
25 Aug, 06:06PM
The challenge then, for me, is to prove what these professional analysts have said about earnings is correct. First of all these are not just some random people on an internet message board. These are top notch individuals who Yahoo has selected as experts regarding Sirius XM. Below are the analysts that Yahoo Finance lists:
This is a list of top research analysts based on the accuracy of earnings estimates on SIRI, according to StarMine. Analysts that appear here are limited to those covering SIRI for a significant period of time. Learn More.
|Total Ranked Analysts: 14|
|EPS Accuracy for SIRI - Trailing Two Fiscal Years and Four Quarters|
- Bank, David of RBC Capital Markets
- Bazinet, Jason of Citi
- Crockett, Barton of Lazard Capital Markets
- Hamby, Tim of Janco Partners, Inc.
- Jayant, Vijay of ISI Group
- Kraft, Bryan of Evercore Partners
- Marsh, James of Piper Jaffray
- Ratcliffe, James of Barclays
- Tinker, John of Maxim Group
- Wlodarczak, Jeffrey of Pivotal Research Group
- Yong, Amy of Macquarie Research Equities
After reading the transcripts to some of the conference calls, and going back over a lot of the financial information for the last several years, I do not see any reason to doubt what these people as a group have to say. Individually I have issues, and that is why I think the higher estimate is still correct. And keep in mind the high estimate is only an additional penny in the fourth quarter. As I said before, the third quarter average and high estimates are both 3 cents.
Secondly, this data is not "old" at all. Rather it is borderline breaking news, since it has not been widely reported yet (that I can find). I first found out about this news in an excellent article by Qineqt on Friday, and began to research it:
Analysts have been positive about the third quarter results for SIRI, as Q3 EPS estimates have been raised to $0.03 in the last few weeks.
When I finally found verification for the 3 cents a share (for the other article), it was reported on Yahoo to be only seven days old since the change from 2 cents to 3 cents. This says to me that the "new" costs from the debt (mentioned above) had to be factored in to the current analysis, because those were huge breaking stories that a professional analyst researching Sirius would have known about:
|EPS Trends||Current Qtr.|
|7 Days Ago||0.03||0.02||0.55||0.10|
|30 Days Ago||0.02||0.02||0.08||0.11|
|60 Days Ago||0.02||0.02||0.08||0.10|
|90 Days Ago||0.02||0.02||0.08||0.11|
Since CEO Mel Karmazin mentioned the real possibility that the company might retire the September notes early, and even assigned a cost of approximately $300 million to the transaction, then I think most analysts would have included this in their models. Here is what he said on the 2011 year-end conference call in February:
Our ending cash balance in 2012 should be about $1.5 billion or about $1.2 billion if you assume we call the 9 3/4% notes this September. And our gross leverage will have fallen to under 3.2x.
And consider all of this was reported on the same day that the sub guidance of 1.3 million net adds was released. At that time analysts assigned the EPS of 2 cents (each) for Q3 and Q4. The projection for new cars was 13.7 million for 2012, and no one knew what the implications of the new Apple (AAPL) On Demand App would be. Now analysts are predicting another 300 to 500 thousand new autos for 2012. And Sirius is projected to install satelitte radios in 70 percent of those new cars. The new 2.2.0 Apple App is off and running now. This is only the second of three steps toward total personalized internet radio for Sirius.
So considering that these debt expenditures were probably planned in the guidance, I consider the additional subs from the cars and internet to be part of the reason that the EPS was raised. Mr. Karmazin mentioned that each sub brought in additional revenue of $139 each. So, if I am right, and the net sub additions come in 700 thousand higher than was originally predicted in February (for 2 cents EPS), then that is an additional 100 million in revenue. As the subs go up, the costs per sub go down. I think this 100 million in pure cream could be what analysts think will become part of an additional 65 million in earnings, or a penny per share for Q3. And do not forget about the additional money from refinancing the debt. Something else to think about: If I were in control at Sirius XM and I knew that the NOLS would be counted in the Q2 earnings, I would throw all the costs that I could into that quarter. And any income that could wait....would wait. That is complete speculation on my part, but I think it would have been a wise move.
The reason that I agree with the high estimates of 3 cents for Q4 is that there should be a share buyback by then. This will take shares out of the float, and make the EPS higher. Even without the buyback, this will be the first Golden Quarter with a full inventory of new 2.0 gadgets. The newest personalization concept should be out by then, and this will be a big selling factor for subs and portable radios as gifts. If only ten percent of the current subs add an internet sub (at $3 a month) to their current subscription, that would be another additional penny. But I am not counting it! And then there is the additional money gained from the new interest on the debt. However, if the debt was part of the original guidance, that may have been included in the two cents a share estimate, along with the 12% price hike that took effect this year.
I agree that analysts are not always right. And things happen to ruin even the best laid plans. I know that not everyone agrees with my analysis. And I encourage everyone to do your own research on every investment that you own. But there are too many investors that seem to think Sirius is heading for the moon based on superior products, and management. I happen to think so too.