What’s Going on with Sirius XM Stock?

I want to focus our attention on the fundamental side of Sirius XM (SIRI). I think the debt issue has been beaten to death by naysayers, and my position is firm: It’s a non-issue. Refinancing of some debt will occur in 2009 and in my opinion will be more favorable than it currently stands. Sirius XM will have a much better balance sheet and as such should see an improvement in its credit rating by that time. This should lead not only to better rates but also better credit options.

Speaking of balance sheets, Sirius recently released its second quarter report. One of the attachments to that report includes a combined financial statement. It takes some getting used to but this is the first clue we have as to the potential strength of the combined company. I say potential because it does NOT include any synergies of the combined company.

It is for this reason that I am not going to cut and paste a bunch of numbers that only an accountant could understand. I’ll save that for an actual combined report complete with synergies included. The first thing that caught my eye was the purchase price that Sirius paid for XM of only 5.7 billion dollars. My first thought was that if you liked the deal at 7 billion dollars, you must love it at a 1.3 billion dollar discount.

As I studied the balance sheet to understand the new structure applied, I made a remarkable discovery. Sirius XM is trading below its book value of 1.60 per share! Simply put, the combined company has total assets of 10.6 billion dollars. It’s total liabilities are less than 5.9 billion. Shareholder Equity is 4,714,068,000. That is not a negative number. That represents the amount of money that would be divided among the 2,948,309,000 shares outstanding.

This is proof positive that the company is undervalued, in my opinion. Not only is it undervalued, it is undervalued based on the combined company providing absolutely ZERO in combined synergies. The book value will no doubt rise even further when the synergies are actually realized. For more on this, visit the SiriusBuzz forums.

Position: Long SIRI

Comments

[Mr. Stupid]

Great article and yes I also feel refinancing will be favorable for the company. Let's see what Mel says after Labor Day and I see the stock on a steady upward slope with some down days of course.

[omagod500]

Is this correct? Someone was spouting off about negative shareholder equity on one of the other articles just last week....

[Come on Guys Lets get Sirius!]

EVERYONE WHO HOLDS SHARES,, JUST BUY A SUBSCRIPTION TO SIRIUS XM... I have been putting bumper stickers on my car and advertising for them as well (FOR FREE) The more subscriptions they get eventually the stock will reflect that which would move it up. Ask ur friends to get subscriptions too! I have lost allot of money in this stock and I just want to break even! I will do whatever it takes! So buy some subscriptions!

[PublicLiterature.org]

Your information can not be correct. I'm long SIRI as well but there is no way that the combined company has positive equity at this point. It's book value has to still be negative (although it may be positive very soon). Please double check your number on assets, you may be adding zero.

[stockdoc06]

You are not even close to being accurate and your statements reflect either incompetence at best and fraud at worst. You are missing the $5.7 billion in goodwill assets that were "created" by Sirius buying XM and corresponding additional-paid in capital "created" by issuing more than a billion shares of stock. Maybe if you learned some of the tricks "only accountants can understand" you would know that the liquidation value of goodwill is zero. In fact, if you are so confident I will sell you $5.7 billion of good will at the bargain price of $1 billion...no joke...hit me up and we'll cut a deal. What Sirius did was pay a whole lot for a company, which like itself, had negative book value and through the wonders of accounting now has a book value of $1.6. Now that I think about it, they didn't pay a whole lot, because they paid for XM with their own negative book value shares. Nice move Mel.

[Doobz26]

That information certainly doesn't seem accurate. I would like to know the author's qualifications before I know that I can trust his interpretation of financial statements.

[Disappointed American]

Isn't it a shame that the FCC has done this to these companies/And and all that invested in the American dream? .... There should be investigations.... But we all know that the FCC can do anything they want without anyone to answer to. That is why I am a disappointed American. FU FCC

[Wanker-Banker]

Are you guys retarded? Please tell me that you know the difference between equity and cash flow. Just because cash flow is negative does not mean equity is too. Cash flow AFFECTS equity; a positive cash flow increases equity and a negative one decreases it. SIRI's book value has been going down as their cash flow remains negative, but that doesn't mean they have negative equity.

[BURTBECK]

This guy Matthews needs a trip to Corp Fin 101. He is an idiot--last week he misplaced three zeroes on another discussion of SIRI debt. Tangible net worth is the only meaningful number and it is bigtime negative.

[cos1000]

Brandon your article on Aug. 12, 2008: Sirius XM Debt is a Non Issue to Investors was filled with poorly researched and inaccurate information. I called you on it then and I am not beating the debt issue to death or am I a naysayer of this company. I am a Sirius XM long time investor who wants researchers, analysts, and authors of this company's financial information to give that information accurately. No more Hype, Pump, its-going-to-the-moon Alice, type of reporting. Real time discussions about real time issues and what the debt and revenue will "really" look like in six, twelve and eighteen months out.

Your dismissal of a need for accuracy around the debt discussion is concerning. It makes me question your assessment of the actual enterprise value of goodwill so as to even be considered as a part of shareholder equity at this time. To use a combined unaudited financial statement that was attached to Sirius' quarterly report, when Mel himself said per DOJ, they had not gotten a good look at XM's books until a day after the merge is more of a "lot to do about nothing".

As a supporter of Sirius XM Radio and a Naysayer of bad and inaccurate reporting, I think we need a lot more than what you've presented here to think we have a true useful "Book Value". I mean we were already blindsided by "11 Hour" financing, that miraculously no one knew about. I truly believe the company has incredible opportunities that will be unwound in the after Labor Day report by the company. Until then, pushing the stock in a positive move forward doesn't accomplish anything, but another opportunity for the "Shorts"

[BURTBECK]

The very fact Mel admits to being pushed into 11th hour financing of $500M (a VERY big number!) under unfavorable terms raises large question as to his competence as CEO. Good gracious, he had 18 months to get the financing in place! And then he evidently said he hadn't really seen XM's books until merger completed--truly unbelievable. His credibility is in the toilet, and anything he says post-Labor Day to further hype the deal is very suspect.

Of the millions of SIRI "strong buys" on Yahoo message board over past 4 years, how many would have said stock would be $1.40 a month into post-merger?!?

Enough said.

[holdon]

brandon, cos1000's post above mirrors my thoughts to the tee. and many others im sure. debt is an issue. till we get a clear picture after labor day.
long siri.

[holdon]

burtbeck, are you saying you can lock in a deal before a merger?

[BURTBECK]

holdon: Yes I am, and further, yes I HAVE.

[jswede]

"Refinancing of some debt will occur in 2009 and in my opinion will be more favorable than it currently stands."

>> In that case, it's clear our opinion is worthless. You have no idea what is going on in the credit markets. SiriXM just had to issue 5yr debt at 16% yield, and a convertible at 7%. This is absolutely the WORST time in Sat Radio's life to refinance debt. 5yrs at 16%!!?!?! a convertible at 7%?!?!?!? this is somehow "favorable"?...


"Sirius XM will have a much better balance sheet and as such should see an improvement in its credit rating by that time."

>>> SiriXM is rated Caa2 and is on NEGATIVE WATCH. This whole "we should see an improvement in credit rating" is based on fantasy / wishful thinking. You are talking about things you don't know anything about.


Fact is, the $1.1bil they'll need to refinance at MUCH HIGHER INTEREST RATES, not lower, further killing margin. You are absolutely clueless.

[D'Ancona]

300 million in debt is due in february. Who is willing to buy with current market conditions?

[cos1000]

D'Ancona, having institutions and investors buy the debt is not the problem, at what cost to the company with the debt be sold is more the concern. Paying down/off these Sirius 2.5% Converts in February, 09 would go a long way to them being able to extend the 350 mil, 250 Mil & 100 Mil in May, 09 credit facility at better rates or even the same rate. There are other possibilities such as a debt deal that takes care of both, at the end of Jan. 09. Sirius XM's cash position will determine the outcome at the time and good performance numbers for 3rd and 4th quarter will help considerably.

[BURTBECK]

cos1000: Paying off or paying down even one penny on the 2/09 converts requires cash, which will be in very short supply in 2/09 and needed just to stay in business.
My view on the enterprise is it's a race between date of ample cash flow and paying the total monthly overhead. Companies usually go under when creditors start pushing hard and credit lines are maxed out. Do you have a figure for cash/near cash on hand as combined operations began?
One operating metric that is alarming is SIRI needed 1.26 gross sub adds in 2Q06 to net out at 1.00 net sub add. In 2Q07 the figure was 1.79 and in recent 2Q08 it was 3.67! Expressed another way, SIRI in 2Q08 added 1.029M subs but had 749K dropouts to net out at 280K. The churn is killing them and I think that raises grave doubts on overall business model.

[cos1000]

Burtbeck, Cash flow increased YOY by 90 mil for six months. In June Sirius paid $201 mil of 3-1/2% convertible notes were paid off reducing their cash for the six months from 438 Mil to 220 Mil on hand as of June 30, 08. The pay down, not loss from operations resulted in most of the cash balance decrease. This is Sirius as a stand alone.

The combined company had a cash balance of $442 Mil as of June 30th, 08 from Sirius's combined statement at the end of their 2Qtr 10Q.

As far as churn goes it has been consistent with 2.8 % being what was reported. This is up a little but not alarmingly so. Your numbers above for churn: adding 1.029 subscribers with 749 K drop out and a net of 280 K is not how churn is calculated. The drop outs are calculated against the average number of total subscribers. Although it increased this in not a GAAP metric but a relative operating metric. The fact is YOY for the quarter subscriber revenue increase 27% and for the six months ending June 30th there was a YOY increase of 30% in revenue. How is that a bad business model?

[cos1000]

In addition cash flow for the six months YOY only improved in 08 by $ 9 mil, but that was after funding approximately $50 mil to build a satellite for a launch in Sept. 09. For the quarter YOY cash flow improve by that same 50 Mil.

[cos1000]

Burtbeck, In all fairness to the company, as much as I worry about their debt and debt refinancing, the other side of their equation is doing quite well in spite of all the negatives. OEM's / auto sales are down but their penetration rate increase into each manufacturer is offsetting the sluggish sales. The synergies of the merger are going to fall to the bottom line, some in the third quarter but completely in the 4th. This means continued decreases in expenses with increases in revenue on the Retail and OEM side with Best of Both offering to existing and new subscribers. I am down on their debt but not their business model or their ability to succeed. I just don't want to talk about stock price at this time.

[cos1000]

Lastly on stock price. There isn't a well run company out their that truly believes it can control its Stock's price. Excellence in execution of a well thought out business plan, resulting in free cash flow, will take care of the stock's price. There should be no doubt in Mel's ability to execute the plan. All we need as investors is some time, a fair assessment of the company's credit worthiness by the Institutions, and some paying down of debt which in my opinion can happen in early 2009.

[holdon]

cos.....once again, great posts! the stock price will follow the companys ability to perform. we can't predict the future, but what we have to go on so far, looks good!

[BURTBECK]

cos1000: I appreciate your posts. You have some good insights and basic intelligence re this stuff. But we seem on opposite sides of this investment. Let me make a few observations and then I'll probabkly drop out of the debate as I'm going to be busy otherwise for a few days. At random:

(1) I will never believe Mel when he talks "free cash flow". In both 4Q06 and 4Q07 he bragged bigtime it had been achieved. Fact is he got there only by not paying current bills. For 4 quarters ending 3/31/08 Accts Payable were $325K, $330K, $489K, $334K. Only because of the zoom of about $160K in 4Q07 was he able to say "cash flow positive". And it was same story in 2006.

(2) You can fiddle churn percentages all you want, but fact is stark that they must run ever faster just to stay even. When the trend of dropouts exceeding net adds is so dramatic, it must be reversed quickly or soon subs will DECREASE.

(3) The hoopla and hype on this company began with Mel arriving and Howard signing a long FOUR YEARS AGO. Losses in $$$ten figures have resulted and every stock buy still held is a loser. Every figure on bal sheet (w/c, ltd, s/e, nbr of shs outstanding, etc) is a disaster. And the p&l must improve its bottom line by the tall order of about $400 MILLION before there is so much as a thin dime of EPS. The continuing mkt cap of nearly $5Billion baffles me!

(4) I began a core short position 11/04 and stopped it 5/06 ---average is $5.55. And I have had maybe 30 trades on the short side--only 2 losses. So I have put $$$ alongside my thoughts and am doing OK. I think I'll start covering my core position at 80 cents and be totally out at lower prices by 12/09.

[cos1000]

BURTBECK, I can't argue with your success at being on the short side of this company's stock. My debate is not interested in the past. I don't short stocks, and I don't play on margin, the two going hand in hand. I don't fault, but instead applaud those sophisticated enough to make money with a "short" investment strategy. My only exception is that I believe that anyone "Naked Shorting" should spend some time in jail along with the investment banks that support this illegal action.

As a generally "Long" investor, as opposed to being a trader, I have added shares to my underlying investment by trading in the channel. This past BS with the 11th hour financing on the Convertibles with Sirius lending shares to support the arbitrage incentive has woken me up to the realities of the "Street", which have nothing to do with me as an honest retail investor. My knowledge of this company's workings, from an operating perspective, is less than Basic, as you put it. But I am naive when it comes to the illegal activity surrounding this companies stock price manipulation. That will Change. Good luck with your investment in the "short" side of this stock, and if your naked shorting this stock, I hope you and everyone involved gets caught. I also believe that this company will survive the street's BS and be a content media company that touches everyone's life soon.

Just to be sure we understand this company's debt. Some have described it's recent debt as "Death Spiral Financing". This term is meaningful to a company whose product has been technologically advanced by a competitor, fallen short in penetrating its prime markets, resulting in declining growth and revenues. This is clearly not the case when it comes to Satellite Radio. The S&P has just taken its existing debt off of Credit Watch with only new issues of debt moving forward being still on Credit Watch until further merger synergies can be realized and better forward guidance released from the company. That's including the worst financing pre-merger heard of in recent history. So good luck again with your covering at .80 cents and totally getting out at lower prices by 12/09.

[BURTBECK]

cos1000: I do not see how you can say everyone doing a 'naked short sale' should do time in jail. Good grief!! Short sales, both 'naked' and as part of a hedge, have been legally done on NYSE, ASE, NASDAQ, otc, all commododity markets EVERY DAY since the days of the Buttonwood tree. They are very important to the grand scheme of things, providing liquidity and a way to monetarily express a contrary opinion. And bear in mind for every share sold short, there is ultimately one bought---"He who sells what isn't his'n, buys it back or goes to prison!"

[killerkaul]

Thanks guys............... for the very informative discussion! killer.