Sirius XM: Explaining The Share Price

| About: Sirius XM (SIRI)

It's often interesting to watch back and forth commentary on Sirius XM (NASDAQ:SIRI). From both authors and commenters alike, it seems that valuations and price targets are constantly being assigned and backed up with all sorts of facts and figures.

There are fundamentalists who will argue that shares of Sirius XM trade at a premium to its peers, and who will argue that at present levels around $3.15 per share, Sirius XM is overvalued or at the very least "stretched" in valuation. Trading ranges are often given, and lots of numbers are used to back this up including examples from historical share prices and historical trading ranges. Because of Sirius XM's current share price and lack of real 2013 forward guidance, fundamental "by the numbers" analysis points to Sirius XM being in overbought territory. Couple this with Sirius XM's tendency to guide conservatively, and it is reasonable to expect that after the company issues 2013 guidance in February that shares will remain, fundamentally, in overbought territory.

That's from a historical and peer to peer valuation standpoint, though. As we see in the market, it's more than just a numbers game. Amazon (NASDAQ:AMZN) trades at an extreme multiple, and Apple (NASDAQ:AAPL) recently collapsed while its multiple was hardly stretched. Why? Because a lot more goes into the share price at any given time than a simple equation. If it were as simple as X+Y/Z^2 = Share Price, with a standard deviation of 5%, then investing would be easy and there really wouldn't be much to talk about. Just plug the numbers and buy low, sell high.

But it's obviously not that simple. Certain activities and expectations can cause a company's share price to exceed, or fall well below, established or expected ranges.

Sirius XM is a perfect example of this, and 2012 played out in perfect fashion to show how activity beyond simple company performance as well as certain effects on a technical level can either support or lower the share price of a stock. Consider the chart below and the links here for short interest and insider purchases and sales. The letters will correspond to the sections to follow. Please note that in order to keep this article of reasonable length not all fundamental and technical issues are covered or discussed.

The 20 day moving average is in red, and the 50 day moving average is in yellow.

A. Overall Market is bullish. Early January Sirius XM reports net subscriber additions which exceed street expectations by a considerable margin. This sends shares up rapidly on fundamental news. At the same time Liberty Media (LMCA) has entered into a forward contract with a third party and will eventually secure 302 million shares of Sirius XM within this contract. This is unknown to the street at this time.

B. Automobile sales are up in January, again sending shares up. This is married to a 20 day moving average bounce from a technical standpoint. Also, somewhere around this area nearly 30 million shorts cover their positions. Liberty's forward contract continues to be filled without street knowledge.

C. Again, the share price bounces the 20 day moving average on high volume. Fundamentally, automobile sales still come in strong and expectations are that Sirius XM will exceed subscriber guidance for 2012 if they can continue. Liberty Media continues to fill its forward contract as the share price again bounces the 20 day average.

D. Automobile sales continue to show strength. Sirius XM ups guidance. From a technical standpoint the share price bounces the 50 day moving average sharply on high volume. Liberty Media files for 'de facto' control of Sirius XM. Sirius XM submits for a denial of 'de facto' control. Uncertainty ensues. This was a peak, and from here through F the overall market turned bearish. CEO Mel Karmazin begins to sell stock in the millions of shares on or around the 15th of each month from here forward.

E. Liberty Media's forward contract is made known. A bearish cross as the 20 day moving average crosses below the 50 day moving average is made from a technical standpoint on 4/30. Mel Karmazin's shares hit the market as the stock is in a free fall with the bears in control. Liberty Media takes advantage of the spike in sell volume and uses it to acquire 60 million more shares within days. Share prices find support at a key technical level of $1.80 and level off and consolidate. Fundamentally nothing is "wrong" with Sirius XM here, yet the bear market and the "death cross" on technicals contributes to a high amount of selling pressure.

F. Overall market flips to bullish again. Share prices which had found resistance at the 20 day moving average from a technical standpoint break through both the 20 day and 50 day moving averages. A bullish cross is made as the 20 day average turns up through the 50 day in the middle of July. From a fundamental standpoint Liberty Media takes possession of the 302 million shares in its forward contract and thus increases its stake in Sirius XM considerably.

G. Massive volume as the stock reaches new all time highs on a bounce of the 20 day moving average. Within this volume are additional purchases by Liberty Media and considerable amounts of short covering bringing the short interest down by over 70 million shares. Liberty Media will, from this point forward, buy strategically in its pursuit of what will now be 'de facto' control. Auto sales continue to show considerable strength and Sirius XM has again upped guidance.

H. A quick drop to the 50 day moving average and a sharp bounce up after Liberty Media takes a breather from its purchases. Liberty's buying at what were technically overbought levels allowed it to secure considerable numbers of shares from those going short, or simply selling into strength. Liberty's "strong hands" remove these shares from day to day trading among "weak hands" and essentially lock them away.

I. A return to an overall bear market. Liberty Media continues purchasing small amounts as the share price pushes on the 50 day moving average. From a technical standpoint this provides Sirius XM shares with the selling volume Liberty needs to scoop up the remaining shares it requires to go to control of the company. Mel Karmazin completes his sales and announces he will step down as CEO.

J. A fundamental break is caused when the CRB decision for future royalty payments is decided. Share prices rise sharply on the news and move quickly from $2.70 to $3. Sirius XM has also recently announced a $2 billion share buyback plan as well as a special dividend of $0.05 per share. The market is still bearish. Liberty Media waits for an FCC response before it purchases the remaining shares, roughly 50 million, it needs to go to control.

K. The market flips bullish and many stocks gap up, including Sirius XM, on the news that the "Fiscal Cliff" has been delayed. Sirius XM gaps from $2.90 to reach a closing high of $3.16 in subsequent sessions bolstered by news that net subscriber additions for 2012 came in at 2 million, exceeding guidance considerably. Liberty Media receives FCC approval to go to control and quickly purchases an additional 50 million shares as Sirius XM sits again in "overbought" territory far above the moving averages. Short interest increases to record levels, and it is very likely that Liberty Media bought a considerable number of these "shorts."

L. It's not on the chart yet. It's that next point that everyone seems to be waiting for, and it's likely to fall in the next week or two surrounding Sirius XM's earnings call on February 5th.

So what should investors expect? What was the point of this long winded explanation of the past year up until now?

Investors should expect that Sirius XM's share price will not be tethered to "by the book" numbers and valuations throughout 2013. Investors should expect that 2013 will show the equity trading not only on fundamental news and activity but also due to technicals which may deviate at times from fundamentals (and vice versa). The astute investor will learn to follow both, and will use both to find good purchase and, if they choose, sale points.

By considering both the fundamental and technical, investors can take a more 'educated' guess at what "L" may bring.

My 'educated' guess? Let's look at the fundamentals first.

Auto sales for January are coming in strong and may be up roughly 15% over January 2012. This bodes well for Sirius XM which depends on new car sales for the majority of its subscriber additions. Liberty Media now holds a controlling stake in the company, and will likely sell back shares in parity with open market purchases as Sirius XM conducts its $2 billion share buyback plan. It will do this in order to keep its stake at or near just over 50% so that it may get some of the cash back which it spent to go to control. More clarity should be given on 2013 guidance as well as Q4 2012's numbers. Sirius XM may indicate that buybacks have already started, or that they will start soon, adding to cash flowing into the stock and shrinking the outstanding share count.

From a technical standpoint the stock has consolidated and volume has dwindled as the 20 day moving average has provided support. Shorts seem overextended at almost 380 million shares, the highest they have been in quite some time, and many of the most recent have likely sold to Liberty Media as Liberty purchased near the most recent highs. It seems to me that the share price could very well bounce from the 20 day moving average yet again, especially on good news from Sirius XM or from good guidance during the conference call. If a bounce happens and breaches recent highs it may cause somewhat of a short squeeze if shorts feel they are at risk. With the overall market bullish, this is probably not the best place to be short an equity like Sirius XM that has such a strong fundamental story and is in such a strong technical uptrend.

Because of these fundamental and technical issues I expect a pop in share price quite soon. At the very worst I could see shares remain adrift for a short time if the market has a slight correction in store, or if Sirius XM does not dazzle the street a little bit on its conference call.

It has been said before that 'Sirius XM's share price movements defy logic' but honestly the share price movements have been quite logical once the reasons for the movements are known. By understanding and accepting that both fundamental and technical issues drive the share price, investors can be better prepared for the behavior of the share price of Sirius XM.

Disclosure: I am long SIRI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long SIRI $2 Jan 2014 calls.

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