Sirius XM: Right On Track For A Break Towards $4 Per Share

| About: Sirius XM (SIRI)
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Sirius XM stock is behaving as expected.

$2 billion added to existing $4 billion in share buybacks.

Look for a break of $3.50 on a good Q2 report, and a move towards $4 per share.

Given recent news and share price activity, it seems likely that shares of Sirius XM (NASDAQ:SIRI) are setting up for a move towards $4 per share after the Q2 report is released on July 29th. Approximately a month ago, I suggested that shares may consolidate for awhile leading into the impending call, and it appears that estimation was on target. Since I hold a shorter-term $3/$3.50 bull call spread that expires this week, it's time for me to revisit expectations and share some assumptions for the next month of activity.

$2 Billion added to buyback

First and foremost that deserves mention is Sirius XM's recent announcement that it has authorized an additional $2 billion to be allocated to its buyback program. This brings the total authorization to $6 billion, which can purchase around 1.8 billion shares near current pricing. Such a total could reduce outstanding shares by over 25% from the share count at the beginning of the buyback. That's a considerable dent.

As I have said, buybacks are a zero sum game immediately upon execution. Cash or debt are used to buy shares, and thus this transaction is neutral. The benefit comes later, and sometimes this benefit can take several years to begin to materialize, but the general idea is that the company is investing in itself today and should capitalize on an improving share price in the future.

This activity does provide support to the share price as it is ongoing, though. As Sirius XM is in the market for shares, expect a slowly rising floor to the stock, and thus pressure at various resistance levels.

Looking back 1 month

Looking back to what I said a month ago, everything is on track, on schedule, and the same holds true from a technical standpoint.

Sirius XM's share price is marching toward a critical level. The 200-day moving average is a long-term indicator and a breach to the upside here could be considered a significant positive event. Essentially, a multi-day hold beyond this level is "all systems go" from a technical standpoint.

Leading into the Q2 call I expect the share repurchase program to provide support and a slowly increasing share price up to that 200-day moving average in white. Throw the short sellers into the mix who should surface near what is resistance at the 200-day moving average, and time should close the gap between where shares are being bought and where they are being sold.

That could create a situation where a breach of that 200-day moving average on a decent Q2 report could cause significant short covering to ensue, moving the share price upwards rather quickly toward the $4 per share level.

With less than two weeks left, where are we positioned today?

Time has compressed the moving averages. One month ago, the 20-day exceeded the 100-day, and one day ago, the 50-day crossed above the 100-day. These are both bullish and show continuing strength in the stock. The 200-day average in white continues to provide overhead resistance near $3.50, and I expect it to remain this way leading into the Q2 call. To be more specific, with the recent "good" news of the $2 billion extension to the buyback plan, I expect share prices to trade between the 20-day average in yellow as support and the 200-day average in white as resistance. If one missed the dip to the 50-day in red last week, those who wish to go long before the call may need to buy a bit higher at that 20-day moving average from now until then.

And you will want to go long

As long as you follow my line of thinking, you will want to be long going into Sirius XM's Q2 call. This goes against the grain of numerous bearish articles recently discussing how overvalued Sirius XM is or how Apple (NASDAQ:AAPL), Google (NASDAQ:GOOGL), The Boogeyman (couldn't find a ticker for this one), and Pandora (NYSE:P) are going to "kill" Sirius XM.

But those who follow Sirius XM closely know that the company is actually undervalued here. Consider a recent article by Crunching Numbers "CN", discussing whether or not it is time to buy into Sirius XM. While I am often more bullish than CN, it is good to see that even with his cautious nature, he considers Sirius XM to be a good buy here.

What do investors have to look forward to? What should be expected?

  • Continuing strength in auto sales should drive gross subscriber additions.
  • Relatively stable churn should provide increases in net subscriber additions, along with a relatively stable conversion rate.
  • The General Motors (NYSE:GM) contract shift should have worked its way through by now, and negative impacts during the transitional phase should have passed through in Q4 2013 and Q1 2014.
  • Sirius XM Canada (TSX:XSR) paid out a special dividend during Q2 on June 19th. A significant portion of this special dividend gets paid to Sirius XM due to its 47.3 million share stake in Sirius XM Canada. The rough amount paid to Sirius XM should total near $26 million USD after conversion.
  • There are few-to-no expected "one-time charges" which should negatively affect the Q2 report, such as legal expenses related to Liberty Media's (NASDAQ:LMCA) equity swap offer that appeared in Q1.
  • Some focus on the $2 billion addition to the current buyback program, which has already been announced.
  • Short interest continues to build, placing significant numbers on, in my opinion, the wrong side of the fence. This may cause a good amount of covering on a well-received Q2 call.

Reception of Q2 is of paramount importance to my $5 area target for January of 2015. If numbers are good and well-received, and forward guidance is positive, I don't think it is unreasonable to expect shares to breach the 200-day average and start ascent from $3.50 to $4 per share somewhat quickly. If reception is lukewarm, shares could languish in this area, with a slight upward bias in anticipation of Q3 over the next three months. If this were to happen, I may adjust my target for January down a bit.

I don't expect a poor call, but if one is nervous that bad news may be forthcoming for whatever reason, then it would not hurt to remain in cash with a "wait and see" approach.

I certainly wouldn't be short here.

Finally, since many have asked for input on the shorter term, consider the following. My smaller month-to-month position, which is a $3/$3.50 call spread that expires this Friday, requires me to reposition for the impending call. My goal with this small amount is an average gain of 10% per month over 12 months, and because of this, I will likely be opening the same spread, 100 contracts, with an August 16th expiration at an assumed cost of $40 per contract after fees. I am looking for pricing above $3.50 on August 16th and assignment of these options at around a 25% profit. I fully expect to leave money on the table here, and I'd be quite happy to do so with a 25% gain in hand.

The bottom line? Hold steady

Often, a catalyst is needed to break key levels in share price. I expect the next possibility of such a catalyst to come with Sirius XM's Q2 report on the 29th. With the company's buyback plan raising the floor, short interest soaring, and volume decreasing, there are the makings of a mini "perfect storm" for the share price to make a significant move one way or another. I'm still looking for a move to the upside and for the share price to head to the $4 level sooner rather than later.

Disclosure: The author is long SIRI. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long SIRI Jan 2015 calls at $2.50, $3 and $3.50. I am long SIRI Jul 19th call spread at $3/$3.50.