Sirius XM Radio Inc. (SIRI) is finally stepping into the Wall Street limelight. As the market crashed around it Friday, Sirius maintained most of its new found value, as it inched toward $3 a share. The Sirius bulls are celebrating, as the stock continues to shoot higher in spite of a dim macro outlook for the economy right now. Shares which were as low as $2.44 on September 26, hit $2.97, another 52-week high, on Thursday:
Most of the non-believers are wondering when this satellite bubble will pop. Even some of the bulls are getting concerned about whether CEO Mel Karmazin will stay or go, and what effect it will have on the stock. Many Sirius investors are also concerned about what Liberty Media (LMCA) might do when, and if, it spins the company off as part of its current "hostile takeover".
First, for the non-believers, this is not a bubble. The stock is strong, and the company is solid. And a Liberty spin-off is months away. However, if Mr. Karmazin leaves right now, it will negatively impact the stock price. We are facing the probability of a fiscal cliff if Congress does not act immediately, and there is no margin for error. But, there is a silver lining in this scenario. If shares drop, the company could immediately start share buybacks, and take advantage of a new lower price. This action would then stabilize the price, and send it higher again.
Last March, I wrote an article in which I said that if the analysts with the high price targets of $3.20 were right, then a billion dollar buyback could send the shares to $3.63. Granted, the share price was only $2.22 at the time. However, the rumored $3 billion buyback is much more aggressive than the one in my model, and analysts are projecting much higher price targets now. The buybacks are currently baked in to the price, which should yield a target of over $3.50 a share after the first buyback is complete, in spite of the fiscal cliff. And if the cliff is averted, a $4 price is definitely possible:
|No. of Brokers:||14|
There is another hurdle ahead for Sirius. Earnings will be reported on October 30. As you can see from the last two days, companies that disappoint investors on the conference call will be severely punished. And as many loyal Sirius followers will attest, Karmazin tries to avoid that possibility to a fault. But this time, there is a little twist. It will not affect shareholders who are in it for the long term, but it might be an opportunity for traders.
In August, I wrote several articles about the fact that some analysts had raised their earnings estimates for the third quarter to three cents a share. And with estimated earnings for Q3 and Q4 combined to equal five cents a share, there would be a huge increase over the three cent EPS for the same two quarters last year. This theory was met with many arguments from investors who pointed out that there would be new unexpected costs due to retiring some of the Sirius debt early. This is the original Yahoo finance chart from the second article in the series:
|Earnings Est||Current Qtr.|
|No. of Analysts||12.00||12.00||10.00||11.00|
|Year Ago EPS||0.02||0.01||0.07||0.5|
So I constructed a model based on research, and my belief that Sirius would add an additional 2 million net subs in 2012. However there was one unpredictable variable in that model: $112 million in additional NOLS, which according to the last conference call will be recognized "before the end of the year". To get to the three cents a share in Q3 those NOLS will have to be recognized in that quarter. If it were me, I would use them to offset the "debt costs"in Q3. However, just recently, the analysts have lowered their estimates for Q3 back to two cents a share. I promised readers that I would let them know if that happened:
|Earnings Est||Current Qtr.|
|No. of Analysts||13.00||13.00||10.00||12.00|
|Year Ago EPS||0.02||0.01||0.07||0.55|
And as you can see, they have also raised the estimates for Q4 from two cents a share, to three cents. So before you panic and take your profits before the earnings call, keep in mind that the company is still projected to earn five cents per share over those two quarters. Why were the quarters suddenly reversed? It could be that the NOLS will now be put into Q4 instead of Q3. At first glance, investors may consider Q3 a disappointment, if it does not beat last year, which might slam the stock back to $2.50. However, the announcement of the new higher guidance for Q4 should keep that from happening.
Keep in mind, there are still some analysts on the list that think the earnings will be three cents a share. But because the numbers have been reversed between the quarters, I think the company is saving the best for last (Q4), and Q3 will now come in at 2 cents a share. Some analysts do not think that EPS is a good way to evaluate a media stock, and they would rather concentrate on EBITDA and FCF. Free cash flow is a great metric, but EBITDA should not be used to compare companies like Sirius that do not pay federal income tax because of their NOLS. EBITDA underestimates its true value. For more information on that read, Sirius XM: EBITDA or EBIT Duh.
As you can see from the chart above, Sirius outperformed the major three indexes over the last two years by a landslide. There is no reason to think that this will not continue in the future.
As I mentioned above, the country is poised to go over the fiscal cliff on the first of January unless Congress agrees to a deal. This could be devastating for any portfolio. Sirius XM is one of the most resilient stocks around when it comes to "hard times". It is a very "cheap" form of entertainment, and the company has grown historically high sub numbers throughout the last several years in spite of a difficult economy.
Right now, there are over 23.4 million active subs. As most of you know, Sirius just raised its 2012 sub guidance, for the second time, to 1.8 million. Considering 1.5 million net subs were added in the first three quarters (an average of 500 thousand per quarter), it would be a major disappointment for Sirius to add less than 1.8 million for the year. I continue to think the 2012 net additions will top 2 million subs.
All of my followers know that Sirius is my all-time favorite stock, as it defies all logic and continues upward. Just watch for some dips in the next few weeks, and load up for the golden quarter.