The morning with a cloudy sky, rain sprinkles, and New York City commuters walking their trek to the subway decked out with their protective gear in case the sky's opened up into a downpour. As the morning went on shimmers of sunlight seemed to glow through the cloud cover offering hope that a there would be a chance for a good day.
With that backdrop I could not help but relate it to life as a Sirius XM (NASDAQ:SIRI) shareholder. The forecast seems so promising all of the time, but storm clouds are never far away. It has been quite some time since all of the stars aligned. A year ago 2012 was set to be a very promising year. Minimal debt service, no satellites to launch, minimal capex, a price increase that would increase revenue, and an auto sector expected to recover. Last year the outlook for 2012 seemed to indicate a near perfect storm for Sirius XM.
Now 2012 is here and we have once again seen storm clouds circle in. There is drama with Sirius XM's largest shareholder, Liberty Media (NASDAQ:LMCA), management that is exercising and selling option shares, auto partners embracing competitive services like Pandora, a satellite that still needs to be launched, and an economy that is yet to get into gear. Is all of this as bad as it seems? The short answer is no. Sirius XM still delivers impressive revenue , subscriber, and EBITDA numbers and that trend is expected to continue. The annual shareholder meeting did not present a lot of new data, but did offer some insightful moments that investors seem to finally be getting the grasp of.
Sirius XM trades at a high multiple. Companies that trade at high multiples get punished on a regular basis depending on many outside influences. For some investors the top area of where SIRI currently trades ($2.40) seems justified, while to others that type of premium is not appropriate in this economy. Both camps see the same numbers. The difference is that some see the growth continuing on its current pace while others are not so sure. Ironically, baseball probably provides the best analogy here:
There are 162 games in a baseball season. Every team, regardless of how good or bad they are will win 60 games and lose 60 games. It is the 42 remaining games that define the winners and losers. Sirius XM seems to be sitting right in the middle of those all important 42 games. Do they connect all of the dots and approach 100 wins? Perhaps they split them and come in as a middle of the road team. The worst fear (and not likely in my opinion) is that they lose 30 of those 42 games and miss the play-offs by a wide margin.
What we have here is a classic battle where those that apply a lower multiple to this company vs. those that feel the growth model will continue. The likely situation in my humble opinion is that Sirius XM will probably trade somewhere in the middle until such a time that the Liberty media issue is resolved. From a technical standpoint that means the recent low of $1.83 might serve as an appropriate bottom while the psychological top (thanks to a Liberty Media Forward Purchase contract for 302 million shares at $2.15) at $2.15 will serve as the top end. Shy of new quarterly numbers, this is where the equity will likely remain until we have more clarity.
At the shareholder meeting several things were discussed. Highlights include:
- Expect double digit revenue growth
- 13% of households in the United States are subscribers. An impressive number that still shows room for growth
- Car sales are expected to go from 14 million in 2012 to 16.6 million in 2016.
- Satellite radio equipped cars are expected to approach 100 million bu the end of 2017
- 5,000 dealerships are participating in the used car program with more being added all of the time.
- Current guidance remains in tact. Karmazin did indicate that the subscriber picture thus far in Q2 is good. Reading between the lines we may see yet another boost in the subscriber guidance in August.
- Liberty Media is indeed the biggest shareholder and management is defending the public shareholder rights to the best of their ability.
The question and answer session presented some interesting points as well. Sometimes seeing something like these question and answer sessions provides investors with some insight that are valuable. This day was no different. One shareholder inquired as to why Sirius XM was not on smartphones. While long term holders may see this as someone with their head in the sand, a savvy investor looks at this differently. Why is it that a shareholder that takes the time to attend the annual meeting is unaware that the company has been in smartphones via apps for quite some time? If a shareholder is unaware, what about the average person out there? Regular readers here are in tune, but perhaps there are ways that this company needs to get the word out better.
Another shareholder, very frustrated, inquired as to whether he would ever make money on his investment. He bought in 2001 with Sirius trading at over $11 per share. As unfortunate as that situation is, the likelihood of reaching $11 and a market cap of over $70 million any time soon is slim at best. Investors need to understand this.
The issue of debt was also raised with a question as to whether Sirius XM could be required to pay off all debt in the event of a change of control. Some of the older debt holders would have that right, but realistically speaking, they would have no real reason to call that debt and lose substantial interest payments. Mel Karmazin correctly stated that the company would actually LOVE for some of these debt holders to call their debt. It would allow the company to refinance the debt at much more favorable rates. All debt since 2009 can not be called if the change in control is to Liberty Media. Simply stated, there is no realistic situation in which bond holders would want to recall debt in the event of a change of control.
Recent insider sales were also discussed. Mel Karmazin expressed that the ONLY stock he owns is Sirius XM. Despite his planned sales of 60 million shares, he will still hold an impressive 68,000,000 shares. Without saying it directly, he seemed to indicate that he was a bit overweight in this equity. Realistically speaking should Karmazin have his entire fortune placed in one equity? probably not. He made a prudent move, which actually mirrors his management style. Yes, selling shares does not always look good, but at the end of the day, the management team at Sirius XM all carry substantial positions in the company.
The last issue is the elephant in the room. The Liberty media stake. Karmazin could not speak to many specifics, but he did express that he is focused on keeping the best deal in play for the public shareholders. We will have to stay tuned on this one.