Sirius XM: Show Me, Don’t Tell Me
In his recent interview with Mel Karmazin, David Faber of CNBC received a lot of negative feedback regarding Mel’s promise that Sirius XM would be free cash flow positive in 2009. I for one applaud him. For many years Sirius and XM stock traded based on the unfulfilled promises of cash flow break-even, which were to come “very soon,” or “next year.”
The premise seemed simple enough. There were supposed to be enough fixed costs in SDARS that the addition of millions of subscribers and the addition of hundreds of millions of dollars in revenue should lead to prosperity. Each and every quarter brought with it however, higher revenues together with higher operating costs and expenses. With each passing quarter, cash flow break-even has only inched its way towards reality.
Sirius XM very well may be free cash flow positive in the near future, but the street doesn’t seem to care and to tell you the truth, neither do I. The company has cried wolf once too often. No one believes it anymore, and the sheep are being slaughtered.
I happen to be one of those sheep. In my opinion, there are certain events that are going to happen near-term which will be positive for Sirius XM shareholders, but I don’t think it will be enough. I have heard from Mel regarding the number of subscribers being second only to Comcast. That’s an advertiser selling point. It would appear to me that the near-term plans to improve the balance sheet are well under way. Higher ad revenue and cost cutting seem to be of most importance.
But can the shareholders afford to wait? I doubt it. As the short sellers on Wall Street continue to manipulate the stock and spread rumors that go unnoticed by the Securities and Exchange Commission, the stock continues to make new lows. With every new low comes yet another doom and gloom article by the Motley Fool or the Street.com, or statement by Jim Cramer. Investors are fearful that they will ride the stock down from 1.50 to 1.00, only to see a rise back to 1.40 on any news. The company is giving no real reasons to own the stock right now.
Recently, XM announced a buyback of some of its outstanding notes, and the street had no reaction. In my opinion , a common stock share buyback program is imperative at this point. If there are in fact 400 million dollars in synergies going forward, how about putting 100 – 200 million of that up to prove it. Let’s face it, if the company believes that the stock is undervalued, would it not make sense to buy the stock for the company treasury at this low price? After all they just lent out hundreds of millions of shares for UBS and Morgan Stanley to short against. It would also be nice to see some insiders like Mel and other board members put up a few more dollars of their own money to raise investor confidence. I believe the company MUST do this, and do it soon to salvage what is left of the stock price and raise confidence that a bottom has in fact been made.
Brandon,
The only way this turns into a penny stock is if people sell because it’s goign down… Look at the valuations! It shouldn’t be here, so don’t sell… once the panic momo traders get out we’ll be fine.
Look at the cash flow and ev/ebitda valuations like I said above. Those are the low multiples too because we are in a shitty market.
One last thing. We haven’t heard from many of the analysts yet and the ones that you’ve heard from agree with you so the right thing to do is probably accumulate instead of trying to pick tops and bottoms in the middle of the day.
Sorry for spamming instead of posting in one post but I have another though.
If you had invested pre merger approval expecting a big pop then you are a weak hand… very easy to shake and rattle. These people are largely gone and I think there’s still some who remain.
Now, the people who invested pre merger approval who held it because they saw good value should still be holding because the valuation has improved over what it was before, especially if you take into account what some of the merger approval percentages were that people were usign to value the company. They also had refinancing risks built in.
Now perhaps the refinancing was uglier than expected but the merger approval risk is now gone so at worst they should be offsetting but in reality if you look at the reports the merge price was far above the no merge price so really 70 million in interest a year doesnt mean anything.
All in all I find it kind of stupid that the lowest price to invest would be after merger approval and I’m sure it seems stupid to all of you too. The debt refinancing wasn’t that bad and really it should have been expected. The markets are efficient, they understand the value, they understand that weak hands will sell and they understand they can get cheap shares. So hold and forget it until you see some of the value that the merger will bring.
People selling now because of 70 million interest expense are fools.
The growth is continuing, the penetration is increasing, churn should improve with pricing plans, ARPU might go down but if it does the proposition will still be accretive because it would have meant that many more people sign on (meaning you get more reveune for the same SAC).
I am of the impression that this could be near the bottom of car sales. People will always need new cars, they will buy cheapers cars.
Bottom line: once the car sector shows any signs of improvement or even moderation of the slowdown then siriusxm’s position will improve drastically.
Brandon. You are on the right track! All the ones that thing buying later at a lower price are as demented as anything I’ve ever heard in my life. You really ought to consider what a penny stock looks like. Cause we have it. Keep up the good effort, Brandon.
Socal
My broker friend at GS told me to take advantage of the current stock price. He bought last week for his personal account, and he doesn’t expect it will stay this cheap. He was very happy to be able to buy at such a discount and even sold other positions to buy. He’s also expecting Mel will give investors some very encouraging news this week. He believes the share price will move back over $2 after the earnings report and says smart shorts will cover ahead of earnings.
Long over 400k shares and buying more.
SiriusIntentions
That is exactly my point — there is no reason for this stock to be below book value right now.
For years these stocks appeared to have an inflated book value because (IMHO) they undervalued their FCC license and bandwidth. And now finally, they’ve reassesed this and have appropriately valued their bandwidth/licenses. This greatly increased the book value of the company — but now the market value is below book value. This is something that is going to change, IMHO.
But before that happens, Karmazin has to demonstrate the cashflow abilities of the merged company first.
My point? If the company went bankrupt tomorrow and was liquidated — there would still be enough left over to give the shareholders $1.62 for each share.
The current valuation is insane.
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Hi Homer,
Please can you explain something to me.
OK, I think I understand the concept of the share lending program – guaranteeing placement of the $550 million in XM notes. What I don’t get is why MS and UBS – the “share borrowers” – are forced to sell the shares they borrow at $1.50?
Also, in hindsight do you think Sirius would have been better off selling the notes at a higher rate of interest and NOT offering the hedging facility? In light of the negative and erroneous articles characterizing the share loan as a dilutive offering, not to mention the profound sense of betrayal felt by stockholders who expected a short squeeze after the merger approval only to see Sirius shorted even more, I think the share loan ended up “costing” the company a helluva lot more than they saved by way of a lower interest rate on the notes.
I have a question – someone please help – - I am long too much (more than I’d like to say – -). I read the following that if we liked it at 3, then all the more we love it at .99 but I’m frankly getting spooked out here not because I cant wait – I can – but because of the future I now possibly see more clearly in terms of future dilution – - I see the following post and wonder how the merged co will pay this without massive dilution – can someone please explain:
Plus the combined company must re-finance Sirius’ $300 million convertible Note (Due March 2009) and XM’s $400 million convertible Note (Due December 2009). On top of working out a deal to extend (if not refinance too) XM’s expiring bank credit facility, which is another $350 million (Due May 2009). This can be extended, but the others will need to be refinanced… to a tune of $700 million.
Jeff, it is important to know that Sirius didn’t set the price at $1.50, per se.
What happens, is that Sirius loans the shares to UBS/MS for a nominal fee (which incedentaly is $0.001 per share… or about $262k). UBS/MS then use them to loan to the hedge funds to short… they even found buyers for them. The problem is, hitting the market with 183 million shares (initially) with another 80k waiting in the wings), it’s going to dilute the marketplace. The $1.50 was the price point in which UBS/MS felt they could get enough buyers for the new shares. Sirius had little say in it.
I understand the betrayal part — however, how much will the lower Coupon save them? Likely at least $33 million annually — over 6 years — we’re talking nearly $200 million.
Short term pain, long term gain.
The fact is, anything under $1.62 is below the book value of the company now. That is historically not normal. How is that these companies can trade at 4 times their book values as individual companies — and now, UNDER the book value as a combined company? It’s insane. I don’t see it lasting… and I don’t make pps predictions very often.
Right now we’re wittnessing shares being shorted — and merger traders getting out, killing this stock. Gonna take some time, but this is just my opinion… and I’ve been very wrong on this stock. Remember, I held XM when it was at $40 and didn’t sell it until it hit $25.
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Homer – why do you say it’s trading below book value? I’m confused. When I look at the balance sheet, I see a non-existent book value, a negative equity. If one were to hypothetically liquidate, there’s nothing left over (there’s a deficit unpaid), so where do you get your calculation of a book value and how?
Alex, look at the Pro Forma adjustments:
http://www.sec.gov/Archives/ed.....xv99w2.htm
Homer – thank you. That was very helpful. I hadn’t known about it and I’m frankly embarrassed to invest and not know about that! – -
The “Satellite” is the future of communication and beyond. Global communication demands it, and those of you fortunate enough to afford have that uninterrupted music or news in your vehicle see the benefits of satellite and have witnessed it’s fruition. With that said, Serius/XM hold the keys to a future that will move forward — regardless of Serius/XM. Draw your own conclusions.