Sirius XM: Be Prepared For A Major Tree Shake

| About: Sirius XM (SIRI)
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Sirius XM (NASDAQ:SIRI) has just announced that it has passed 50 million factory vehicle installations of the company's satellite radios and that the radios will be factory installed in almost 70% of all new cars sold in the United States this year:

"We are proud that SiriusXM has reached this major milestone since it directly reflects the strong commitment by all automakers to satellite radio and the high level of enjoyment by consumers for our unrivalled audio entertainment service," said Jim Meyer, President, Operations and Sales, SiriusXM. "The growing installation rate means that SiriusXM is not only widely available to most new car buyers, but is also available to more and more used car buyers. We expect to double factory installed vehicles to over 100 million by 2018 and plan to offer our unique content and valuable entertainment to even more customers in the future."

These numbers are huge. Considering that the amount of factory installed radios in new cars was about 66.6%, this is an increase of around 3.3%, which based on the latest SAAR figures of 14 million new cars for 2012, is 462,000 more Sirius XM radios per year. The current guidance for subs is at 1.6 million net additions for 2012. I have maintained that the guidance is still very conservative and should be raised to 2 million. But we have to consider that the additional subs that would come from these new numbers could be baked into the Sirius guidance. I doubt that is the case, and expect the company to raise the guidance to at least 1.7 million based on these new numbers.

The fact that Sirius plans to "double" the current radios to over 100 million in the next five years suggests to me that on average, they believe the new car sales will continue to hover around 14.2 million per year (14.2 x 5 = 71 million x 70% = 49.7 million). That will equate to a lot of new subs! However, the market is not reacting to this good news. According to Yahoo Finance, Sirius shares hit a new 52 week high of $2.64 on Monday:

Date Open High Low Close Volume Adj. Close
Aug 21 2.60 2.62 2.56 2.57 36,447,100 2.57
Aug 20 2.60 2.64 2.56 2.56 68,008,600 2.56
Aug 17 2.60 2.60 2.55 2.56 35,617,300 2.56

And now on Wednesday the shares are fluctuating between $2.55 and $2.58 in spite of this good news. One thing to consider is that the markets in general are down due to gloom and doom fears. There has been a lot of chatter on some of the financial blogs that there is a correction coming, and it would be wise to have some cash on hand. Sirius is not immune to this type of hype.Chart forSIRIUS XM Radio Inc. (<a href=

When you see (above) that the stock has been literally soaring for the past month, there are going to be a lot of investors that will be tempted to cash in right now. When the stock suddenly stalls, it gives everyone an uneasy feeling, especially after such a run up on the price:

Chart forSIRIUS XM Radio Inc. (<a href=

And there are more reasons for Sirius investors to be uneasy. When the news broke last Friday that Liberty Media (LMCA) would be seeking de jure control of the satellite company, investors jumped in. However, because neither company has made a public statement regarding this news, there are new fears. I have received a few messages from investors that are suddenly worried about Liberty's intentions. And some are concerned about the new lawsuit that has just been filed which is asking for class action status:

A police pension fund is suing Sirius XM Radio Inc's board of directors for letting Liberty Media Corp take over the company without a fight and without paying a premium.

The lawsuit, filed in the Court of Chancery in Delaware by the City of Miami (Florida) Police Relief and Pension Fund, comes just days after Liberty said it planned to take full control of Sirius and its board by increasing its stake in the satellite radio operator to more than 50 percent.

This is very common with any type of merger. No matter what any contract ever says, the end result depends on what a judge decides. In my opinion, because Liberty has been buying these shares on the open market, which it is free to do, this lawsuit should not hold up. CEO Mel Karmazin, and the Sirius Board have defended the Sirius shareholders in respect to a De Facto takeover by Liberty. In my opinion, based on Liberty's new takeover petition of de jure control, Sirius won that battle. If the FCC did set a new precedent by allowing a hostile takeover with only 46% ownership, it would have opened the door to a lot of lawsuits. However that did not happen because of the great legal team at Sirius. So I am confident that the same legal team will be able to defend this suit if it becomes necessary.

There is also the very big possibility that Liberty already has enough shares to complete this takeover. According to Seeking Alpha writer Spencer Osborne:

Get ready for some speculation. Liberty Media could already have all of the shares it needs - either in its possession or under contract. That's right, it is actually very possible that a third not yet announced forward purchase contract exists that would encompass enough shares for Liberty to make its move.

This is very possible, based on the tremendous amount of volume there was after the earnings announcement on August 7. According to Spencer, this could mean that we won't get the big run-up in price that would come from Liberty buying an additional 150-300 million shares on the open market. However, there might be a silver lining to this dark cloud, if it is true. As it stands, Liberty has stated that it will buy those additional shares within 60 days of FCC approval. However, if it does have enough shares already, then the company could structure a Sirius share buyback immediately following FCC approval. The other Forward agreement for October might not be needed for hard control. Keep in mind this is all pure speculation.

What to do now? In my opinion, there is going to be a major tree shake. It is in Liberty's best interest to get the price lower. Even if the company already has enough shares, a lower price will be a positive for a buyback. Once the buyback is completed, the price will soar. I think the Q3 earnings will be just as exceptional as Q2. Also by then we will know if Mr. Karmazin will stay with the company.

So, if you are a speculator, you might take some profits and try to jump back in with a dip. However, keep in mind that when any positive news comes out, and/or if Liberty starts buying on the open market, the stock can jump up like a spinning slot machine in Vegas. Right now, I am holding, but I have some cash just in case.

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.