Sirius XM Recovers Quickly – Testing 52 Week High
Sirius XM Radio announced their Q4 2010 numbers as well as their first blush at 2011 guidance yesterday. The company posted a strong 2010 in which they exceeded all guidance but, investors were nervous with the 2011 guidance. Sirius XM outlined a 2011 that mirrored 2010 rather than showing the substantial growth most were expecting. The guidance sent shares down into the $1.60’s from a previous Monday high in the $1.80’s.
Today the company has virtually recovered all of that pullback and is once again flirting with a new 52 week high. Why the sudden change? Mel Karmazin stated it best when he explained that the company is just not confident in being more aggressive with guidance this early in the year and with the economy in the state it is in. With a banner year in 2010, is it really all that bad to match it again in 2011?
The real story here is free cash flow. This is the one area where Sirius XM was aggressive in the guidance. They are guiding 50% growth in this area to $300 million. Free cash flow is what will allow the company some latitude for investing in other companies, paying down debt, or even share buybacks and/or dividends.
With Karmazin at type helm I would look more toward the company investing into future growth than a share buyback, but that news will sit fine with investors looking for growth.
The bottom line is that today’s recovery demonstrates a confidence in Sirius XM at these levels and beyond, and that after the initial shock, people think Mel Karmazin is once again under-promising and over-delivering in 2011.
Position – Long Sirius XM Radio
I was not expecting this bounce back so soon. I was thinking maybe we’d get a chance to buy some more around the 1.60 level. Maybe we’d have time to watch it. I guess with confidence growing and analyst raising price targets the dips might not last very long. Now this is a good problem. We might actually have to chase Sirius/xm. Spencer, I hope you weigh in on Mel’s Pandora comments about sirius/xm adding a feature like theirs.
“Long term, we expect to maintain some debt leverage at SiriusXM. As a subscription based business, we can probably tolerate a significant amount of leverage but just assume we keep leverage at a modest level like 3x adjusted EBITDA. In that case, we clearly would not be diverting much of the future cash generation toward reducing debt. In fact, we might more likely increase gross indebtedness overtime as we continue to grow the business.”
“So will we buy assets with our excess cash? Perhaps, but we haven’t seen anything yet that’s worthy of any meaningful investment or acquisition. Then will we return capital to shareholders, although I certainly can’t quantify the amount or the timing for this, I think it is reasonable to expect that the company will return capital to shareholders over time.”
Mel K
2/15/11 CC
You need to correct the $160 to $1.60 I think it makes a difference 🙂
Karmazin was unusually straightforward during the CC that the company is more likely to buy back shares then pay dividends or make any acquisitions. He also made it clear that if the buyback happens, it will be with the float rather than from Liberty’s 40% stake. As I said earlier, the stock is as solid as a rock. We should expect another credit upgrade by S&P and Moody’s that may move the stock well over $2. The way I see it is that the market is waiting for any good news before the next CC to move the stock above two bucks. It is quite possible that this may happen on mere further analyst upgrades without any great news. You can imagine what will happen after the price increase in the second half of 2011. Karmazin was quite clear about that. Shares buyback and price increase were the two pieces of news I was craving for. That is what will make siri market darling again as in 2004. Fortunately for shareholders, this time it is going to be on real merit. Some hype will not hurt either. .
I know what mel said, but he us a deal maker. He would never show those cards….bottom line is I think he is looking for the next deal
What kind of deal? I am really puzzled why we need to twist his words rather than discern his motives. Knowing Mel, it is absolutely clear that he will raise the prices at the earliest and most opportune time. Knowing Mel, it is obvious that what is killing the share price is this huge number of 6.4B shares. Mel projected 1.4M sub growth in 2011 not only being unsure of the economy but also to account for possible loss of a few hundred thousand subs because of the price increase. It will not be more than that. We already have the experience of the royalty hike. Everybody was griping that customers will leave siri in droves. Never happened. In the worst case, siri may have lost a few hundred thousand of the core subs, if that many. The 16.7M subs (or subscriptions) are mostly people who do not care if the price goes up a few bucks. For two reasons – (1) they truly love the service and are addicted to it and (2) the price is still quite affordable. As I recall, you once said something like “siri monthly subscription equals three trips to Starbucks”. Let us not blow things out of proportion. $15-$16 sub fee a month is lower than any other fees we know of. Any other monthly expenses we have are way much more, be it discretionary or not. Price increase is 100% integral to Mel’s fcf growth. Due to it, we will see more than $300M in 2011 and a least a double in 2012. Mel knows way too well how to please the market – growth, more attractive pricing policy from the point of the market and fewer shares. He hit the nail on the head with analysts. This is exactly the story they want to hear.
Spencer,
I am still waiting for your substantive response.
Spencer,
Are you going to respond?
v….
I am traveling, so please bear with me in how fast I get back to you.
I agree that a share buyback will be in the cards, but in my opinion it is a ways off as yet. Mel is a deal maker. We know this. He is always looking for a deal to expand and grow. One thing we are seeing over the next couple of years is a growth curve that is no longer a “hockey stick”, but instead flattening out.
Liberty, a 40% stakeholder in the company has a huge say in what the company does. Malone is also a deal maker. I look for a deal of some sort to happen before a share buyback.
Spencer,
I appreciate your answer. I agree that they are both deal makers. Still, I view the buyback, at least the beginning of it, before any major deal unless the deal is liberty move to acquire siri next spring. I cannot say if this is good or bad but my gut feeling is that it may affect the stock price adversely. I also agree that siri needs to rev up its mobile devices penetration and after market in general. With time, when the most enthusiastic supporters are already onboard, it may get harder and harder to maintain solid growth numbers. Still, the next three years starting this one will be very strong with impressive share price run to $6-$8 ranger otr even higher. Share buyback will be a major contributor.
now that sirius/xm is above water again and the merger is compleat, can you return some of our channels you took away? BOOMBOX, THE BEAT, SYSTEM,DISORDER, THE STROBE, LEFT OF CENTER ect. we need more dance channels.