Why Did Satellite Stocks Head North Friday? 49 comments
an article to
-
Font Size:
-
Print
- TweetThis
After a virtual drubbing over the past couple of weeks, the satellite radio stocks of Sirius (SIRI) and XM (XMSR) saw a boost Friday that gave investors a bit of a break, and perhaps even set the tone for a good weekend.
The natural question at this point is, why did this sharp upturn happen? As with anything there can be many answers and theories. Theories from FCC votes being leaked, to shorts covering for the weekend, to market manipulation are all ideas that people seem to love to discuss.
Personally, I look at the upturn in both Sirius and XM and see something interesting. Sirius was up more than XM. Thus, the arbitrage spread actually got larger in the last couple of hours of the day. This activity could give legs to the theory that shorts are covering. One popular arb play if you felt the merger would pass was to go long XM and short SIRI.
I also consider the fact that the Draft Order has been issued, and that there is speculation that we could begin to know commissioner stances by mid next week.
Combine these two theories, and it is possible that we are onto something. How much upside this can deliver is yet to be seen, but Monday will be a day that investors in the sector may want to pay attention.
Even with a nice jump late Friday afternoon, neither equity reached levels of the trading channel that existed for most of the merger process. Thus, satellite radio is still in a bit of “no-mans land” - below the trading channel and above the $1.75 price target of Wienkes. If the equities hold their ground, we may not see a new report from the Goldman Sachs analyst, which was something I was looking for to help establish a bottom. Without an established bottom, there is still some trepidation out there that investors may want to consider.
Over the next few days, some information will become available that may also impact SDARS. OEMs will be reporting June sales early next week. One factor that has satellite watchers nervous has been the continued downtrend in vehicle sales. If a bad trend continues, satellite investors will want to be on top of the news as it begins to come out. Not only will the June sales represent a month, but Q2 as well. With 6 months now gone, this would be the time that analysts would be sharpening their pencils and going through their assumptions. Some analysts have already projected that the retail channel for Sirius will be better than previously assumed. Solid news on the OEM channel will be a focus now as well.
Sector watchers should follow FCC activity, the OEM numbers, the arb spread, as well as the trading volume. Things could be ready for a change, and now is not the time to take your eye off of the ball no matter what your investment strategy.
Position - Long Sirius, Long XM
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
Goldman's Sirius Call: Solid Thesis, Poor Timing
by: Mike Stathis posted on: June 29, 2008 | about stocks: MSFT / SIRI / SNE / XMSR / YHOO
*
Font Size:
*
Print
* Email
I just wanted to make something clear with all this talk about satellite radio. I'll be blunt. It's going nowhere. That is why I haven't followed Sirius (SIRI) or XM (XMSR) for several years. Why waste my time when I know how the game will turn out?
Let me explain. After releasing a research analysis on the sector in my newsletter in 2004-2005, I have not bothered to follow the satellite radio stocks because I already knew their longer-term fate. It's the same action I have taken on other companies that I predicted would go bankrupt or be sold on the cheap. And I have been right about all of them. It's not that I have a crystal ball or that I'm amazingly clever; it's just a matter of using some common sense combined with an understanding of business dynamics and competitive forces. I will summarize the main points of the 2004-2005 analysis I made on Sirius and the future of satellite radio:
Sirius will not make it. It will either go under or be sold on the auction block. Why? The industry has poor business dynamics as a standalone. It has high churn, short retention, and high customer acquisition costs. Only a diversified company can remain in this business. The wireless providers realized the need to secure a certain level of guaranteed revenues and they came up with contracts. The satellite radio business has not structured any value into their business that would allow them to drive revenues on a contractual basis. As a result, revenues are highly uncertain and will remain volatile, while net revenues per subscriber have little room for growth due to the high churn.
The enormous debt seen in Sirius and XM is just one indication of the poor business fundamentals of this quasi-sector. Just look at the profit and operating margins. These guys won't be able to turn a profit until they surpass 20 million subscribers. And that simply is not going to happen for a very long time if ever. As it stands today, Sirius is in much deeper trouble than XM. The company self-destructed by giving away most of its equity to its CEO and Howard Stern, as if the stock had little value.
It turns out that it didn't have much value. Even Stern apparently realized this and sold his stock.
While XM is fundamentally stronger and will emerge the winner, this won't last long. The big guys in media will force XM out when Internet is installed in autos which is coming in a few years. Yahoo (YHOO), Microsoft (MSFT) and others will offer free Internet radio as a way to seize the market. Then they will offer a paid service similar to satellite. This will steal away the customer base of the satellite providers. In the meantime, earnings from their other business lines will enable them to endure difficult transitional periods. If needed, the big media players will create a price war which Sirius and XM will not survive.
The only one's who will profit from Sirius are the CEO and Stern.
Things are playing out just as I predicted. Soon you will see how even the XM-Sirius combined entity gets destroyed when Internet radio enters the scene. The only thing that has changed in the four years since my report is that Yahoo has weakened and may not go forward with an Internet radio platform, at least for a while. But you can bet others will. If you do not understand the media war that has been going on now for several years, you really need to get up to speed. The big players in this war are Microsoft, Sony (SNE), Yahoo, some of the telecom and cable providers. The XM-Sirius entity will ultimately have to go up against these guys and they aren't going to win.
Now, will the combined XM-Sirius entity appreciate in price from here? I wouldn't doubt it. After all, many companies on a downward trend make short-term bounces. But that might only provide an exit for existing shareholders, as the odds of satellite radio surviving long-term are very slim. Internet radio is the future. And the only way satellite will play into the picture is through satellite-Internet radio, which will be a free service, with an optional paid service for no commercials. Once the paid service of XM-Sirius is knocked out, only then will the paid service model be a growing entity. And the only role XM-Sirius will play in this might be after being bought on the cheap by one of the big players.
You can bet Sirius is desperate for this merger to go through because they realize they're on their last leg. It's similar to the situation with Blockbuster (BBI) practically bending over backwards to merge with Circuit City (CC). Unlike XM, Circuit City has something to offer-a real business with a long history of profits and no debt (only seasonal borrowing or inventories). You can probably tell how I feel about any possible Circuit City-Blockbuster deal. But that's another story.
Only time will tell if I was completely right in my analysis. But one thing is for certain: those who read my report 4 years ago (quoted above) had a chance to bail out of XM and Sirius at $25 and $7 respectively.
Sirius was never a stock held by a large percentage of institutions because they realized the risks. I continue to notice the same investors who buy terrible stocks like Sirius have a habit of buying trash like Krispy Kreme (KKD) and a host of others. People, if you really want to play this investment game, you need to start figuring out these things on your own. Otherwise, leave the investing game to the pros because the really sharp guys out there know what's going on and they sure aren't going to tell you. And you cannot count on Wall Street to help you. While the Goldman analyst is dead right, I find it remarkable it took him so many years to issue this report. I'm not sure whether he just isn't that bright or his focus was on landing banking business. Most likely, it was the former since I still have not read any report that provides the insight I have.
Wall Street makes sure investors have a misguided sense of reality by issuing so many "Buy" ratings. Everywhere you look you see "experts" talk about how good it is to invest in the stock market but you never hear timely warnings when you should get out and wait for the next bull market. The refusal of Wall Street and those who control the media to even hint that there might be a period of a few years when you should stay out of the market is the reason why most investors get caught in bear markets.
Going forward, if you want to have a chance as an investor you're really going to need to change this mentality. Otherwise, the "do-it-yourself" approach is going to result in a disaster for many. Remember, the promoters of this fantasy – the online brokers – are just as guilty of this deceit as Wall Street. And they are making profits selling you this epiphany. So you might be better off buying ETFs.
Disclosure: None
On Jun 30 08:21 AM cos1000 wrote:
> shure46.....The US Markets are dollar based, foreign currencies are
> dollar based, as is oil and commodities. Look at the rise in foreign
> currencies / dollar and foreign markets / dollar. Our markets don't
> adjust all that much to fluctuations in the dollar but theirs do.
> Our markets Global Companies profit from the weak dollar, greater
> exports. I was following you for a bit until your melt down....LOL.
Gates has to put his money somewhere.
On Jun 30 10:17 PM cos1000 wrote:
> shure46......for the confusion, that you totally admit to be yours,
> you and your clan must follow the horses as we go into battle in
> support of the Blue Dog. The Bio Diesel bucket will be to right,
> pulled by the solar powered waste digester. Excuse me,....isn't this
> the alternative energy site??? Where's my wind powered GPS when I
> need it......All is good my friend, just found the medicinal wagon
> carrying hemp.