I recently wrote an article about how a Sirius XM share repurchase program might be in order. It was met with some skepticism to say the least so I thought I'd go into more detail and present a case.
Let me begin by making it clear that I in no way believe that Sirius should go into the open market on Monday and spend 100 million dollars on its own stock. Stock buy-backs do not work that way. They are usually stated by a company, that from time to time, and at its own choosing the company may buy back shares when it feels the stock is undervalued.
An immediate benefit would come psychologically from the mere announcement of a buyback program. A repurchase program immediately signals to the market that the company feels its stock is undervalued. Last month for example, Eastman Kodak (EK) announced a stock buy-back program and its stock shot up on that news.
The first thing that happens is that shorts run for the hills. The company is declaring war on short sellers by telling them that the downside is limited. Sirius would be signaling to the shorts that their profit-making days at shareholder expense are over. With limited downside potential remaining, most naked shorts would cover.
Overall growth is important, yet not as important as growth per share. As shares are removed from the market, per share earnings grow, whether or not revenue does. Each outstanding share becomes more valuable because EPS is increased right away. Think of this as another way of offsetting slow auto sales and retail growth.
A stock buyback program is a lot more shareholder friendly than a reverse split. There are value investors who look to invest in companies that are actively seeking to buy back their own shares.
As for the cash flow argument made by my esteemed colleague, I disagree. Sirius does not have a cash flow problem. Granted the profit is not there yet, but the cash is there and it comes in each and every month in the form of subscriber revenue to the tune of billions of dollars annually. Sirius common stock remains one of the most heavily traded stocks and as such, the asset remains very liquid. That to me is the key. At any time in the future should the company need to raise cash for such things as capital expenditures, it could very easily convert those shares back to cash, without increasing the float or taking on new debt. The shares are still logged as a cash asset on the books.
Position: Long Sirius.