What an awesome day to be invested in SiriusXM (NASDAQ:SIRI) or Liberty Media (NASDAQ:LMCA)! SiriusXM had massive volume and closed the day at an incredible $2.50. The strong upward move came on the heels of news that the company was doing a $400 million note offering for the purpose of paying off high interest debt due in 2013. Not only does this change the debt picture substantially, but it will also serve to change the valuation multiples applied to the company. Essentially the street is fiannly coming to grips that SiriusXM has a very strong fundamental footing and can be a virtual cash making machine. It has been long overdue for the street to acknowledge this and has been a constant battle in the gap of understanding SiriusXM seems to be narrowing.
From a technical standpoint we are now in very interesting territory. The volume speaks for itself, but the support and resistance technicals now have a fun challenge. With SiriusXM blowing through all levels of resistance what represents the next challenge? More on that below.
With over 300 million shares traded SiriusXM has shattered the recent trends in volume. I often speak that volume is a good indicator of the strength of a move. Sirius exhibited herculean strength today. yes, some of this could be shorts running for cover, but we need to remember that the short side of the market has a huge natural position thanks to convert notes. Additionally, short traders will also enter new positions at these higher prices.
One thing I can say is that it will be difficult for this type of volume to continue. Day’s like this are the ones that reset support levels and help define the path going forward. What you want to watch for tomorrow is where volume is. While it will likely be lower, we want to see it remain above the 200 day average volume.
Support & Resistance
What happens when an equity closes above all resistance levels? That is where the new fun begins! It is too early to establish a new resistance level, so what is the target? The answer to that will be identified over the next several trading sessions. Is it smooth sailing above? In some ways yes, but in others no. What will cause the uptrend to break? Enough sellers carrying the sentiment that the top is in. Thus, what we have to look at is support.
Bear in mind that it will take some time for new levels to develop. However, we can see support at $2.35 and again at $2.27. The level at $2.27 is the first real strong level and could represent a longer term support point when things settle down a bit. For right now this is the downside risk with the company. That can change if the company is able to hold the line at $2.35.
The exponential moving averages look very impressive right now. With the stock closing at $2.48 we have plenty of room between each successive average. The levels indicated here can also give weight to the support line for SiriusXM. Wit the 5 day EMA at $2.30, you can see why I still associate $2.27 as a consolidation point. Until the 5 day EMA can match up with the support level at $2.35, I have to remain where I am in the consolidation assessment.
The key here is any close above $2.35. Each time this equity closes above $2.35, the more strength that level can get, and the more liekely it will be that Sirius XM can align an EMA level with a key support level.
This chart simply shows the EV/EBITDA multiples that the equity currently trades at using the data inclusive of the NOL impact and exclusive of that impact. The higher the multiple the more of a “premium” the company is trading at relative to its peers. The tendency has been that a multiple over 20 has not been supported well and the equity begins to sell off. On the other hand, a multiple at 15 has been seen as too low, and the equity tends to appreciate. Bear in mind that these multiples and the stock price reaction are applied to current guidance numbers. One key here is understanding current multiples the equity is trading at vs. models that use other assumptions to apply a price target. Below I have charted the current model with an assumed $3.00 current price and then compared it to a forward looking model that adjusts the levels of debt, cash, etc. Where many investors lose track is in the fact that analysts are looking forward typically one year. By example, analyst John Tinker of Maxim has a model that makes several assumptions in arriving at his price target of $3.35. He assumes 2013 EBITDA of $1.17 billion as well as a share buyback of 650 million shares. It is imperative that investors understand these dynamics. All to often I see investors focus on the price target without really understanding the model that gets the analyst to arrive at that price. Whether an analyst model is conservative or aggressive is an important factor to understand. A conservative model may include actual company guidance on metrics, which tends to be lower than the actual numbers that come in. It is also important to note that models can change as new information becomes available.
Below are models with current numbers and a $3.00 (now) price vs a 2013 model with some different assumptions and the same price target of $3,00. The changes are that in 2013 I modeled the debt as being lower, more cash on hand, a lower NOL value due to use, and EBITDA guidance of $1.17 billion.
As you can see there is a dramatic shift in the multiple. A current price of $3.00 would be fast approaching the sell off point by both the inclusion and exclusion of the NOL effect. Meanwhile, a $3.00 price seems much more comfortable next year with the assumptions in place. Hopefully this helps some investors understand multiples and price targets a little better.