3 Reasons Why Sirius XM Fell Yesterday

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Sometimes a strong quarter isn't strong enough.

Sirius XM Radio (Nasdaq: SIRI  ) had a strong initial reaction to yesterday's first-quarter results. The stock opened unchanged at $2.26, but within minutes had climbed more than 2% higher to $2.31. The stock then turned negative a few hours later, closing lower at $2.23.

What went wrong?

It was an impressive quarter on the surface. Revenue climbed 11% to $804.7 million, just ahead of where the pros were perched. Earnings rose a more robust 38% to $107.8 million, matching Wall Street's expectations of $0.02 a share. Sirius XM added nearly 405,000 subscribers to its rolls during the first three months of the year and raised its 2012 guidance to 1.5 million net additions.

Let's dive into a few of the things that may have held the stock back.

1. 1.5 million net subscribers in 2012 isn't enough
The gem in Sirius XM's report was when it bumped its subscriber target from 1.3 million for all of this year to 1.5 million. Sirius XM now expects to have 23.4 million subscribers by year's end, and that's great.

However, it's easy to wonder why the company wasn't comfortable in going even higher.

New cars are the lifeblood of satellite radio, and CEO Mel Karmazin was encouraged in pointing out that automotive analysts now see 14.3 million new cars sold in this country in 2012. Three months ago -- when Sirius XM initiated its subscriber guidance -- automotive analysts were only banking on 13.7 million cars.

Here is where you have to do some simple math. Nearly two-thirds of all cars rolling off assembly lines for sale in this country now come with factory-installed Sirius or XM receivers. In other words, nearly 400,000 of the 600,000 cars added to this year's estimates will come with satellite radios. Sirius XM is reporting that 45% of car buyers are continuing to pay for the service. In other words, the difference in auto estimates alone accounts for more than 175,000 of the 200,000 increase in subscribers.

When you consider other positives in both the report and the company's conference call, bumping its 2012 guidance just 200,000 accounts higher isn't all that encouraging. After all, Sirius XM now sees monthly churn clocking in below the 2.1% it was targeting at the time of the initial guidance. The company also pointed out that its used car initiatives should result in a million self-pay activations on the used car end alone.

Yes, a lot of folk buying new cars will simply be replacing their existing subscriptions, but the subscriber guidance should have been stronger.

2. Revenue, adjusted EBITDA, and free cash flow guidance should've moved higher
Sirius XM is sticking to its February outlook for the line items outside of subscriber headcount.

Why? The media giant is seeing better-than-expected consumer acceptance to its January rate hike. Sirius XM sees programming costs continuing to decline on both an absolute and per-subscriber basis.

The only explanation for tweaking subscribers 200,000 heads higher but keeping revenue intact is if average revenue per user will clock in slightly below the implications of its earlier guidance.

3. Splitting pennies is an eye-opening experience
Sirius XM has more than 6.5 billion fully diluted shares outstanding. Now that it's profitable we have to factor in Liberty Media's (Nasdaq: LMCA  ) 40% preferred share stake as common stock equivalents. This may be old hat to those who follow the company closely, but it also is a big number to divide any potential profits into.

Sirius XM reported earnings of $0.02 a share, matching Wall Street's target, but let's go out a few decimal points. Divide the quarterly profit of $107.8 million into 6.54 billion shares and Sirius XM earned $0.0165 a share.

Beyond the numbers
The stock has been trading higher since Liberty Media petitioned for the right to take de facto control of the satellite radio giant in March. There appears to be little action on that front since the March petition, and there was nothing in Sirius XM's report to indicate that Liberty Media will be buying more shares to pump up its position in the company.

Sirius XM isn't cheap by most trailing metrics, and that's also a concern to some investors. It gets better if we look out to 2013 and beyond, with Sirius XM fetching 22 times next year's earnings and just 13 times earnings if we go all the way out to 2015.

Then again, given Sirius XM's volatility and heavy share turnover, I also realize that few current buyers will have the patience to wait it out that long. It's a pity. There may be legitimate reasons for yesterday's subtle drop, but there's a quality company underneath all of the speculation and near-term noise.

Running of the bulls
I remain bullish on Sirius XM's future. It should come as no surprise that I'm promoting the CAPScall initiative for accountability by reiterating my bullish call on Sirius XM for Motley Fool CAPS.

XM Satellite Radio was a Rule Breakers recommendation before the Sirius XM merger. It's now gone from the scorecard, but if you want to discover the newsletter service's next rule-breaking multibagger, a free report reveals all.

Editor's note: A previous version of this article stated the number of fully diluted shares outstanding as 6.5 million instead of 6.5 billion. The Fool regrets the error.

The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story, except for Liberty Media. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

Read/Post Comments (6) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 02, 2012, at 10:09 AM, GregsEnail wrote:

    "Sirius XM has more than 6.5 million fully diluted shares outstanding."

    Really? Does anyone proofread these articles for accuracy before they are posted?

  • Report this Comment On May 02, 2012, at 10:17 AM, Austin77478 wrote:

    Rick does a thing like this sometimes to stir the pot. This is pure nonsense.

  • Report this Comment On May 02, 2012, at 10:39 AM, doubting wrote:

    Rick does have a point. Mel was way too conservative in the sub number bump for the year. The way things are going, siri may record between 1.8M and 2.0M for the year. In Mel's defense, he HAS to be conservative to protect himself against any possible legal issues. Now that he has liberty breathing in his neck he has to be twice as cautious.

    If you read the earnings call transcript, you will find more than a few messages there that the company will do much better than 1.5M new subs for the year. As revenue, I doubt that they will do much better than $3.3B. They hardly met 2011 target of $3.0B (it was $3.01B). They will most likely do better on EBIDTA but not by much. There is a strong chance they will clear $900M. Fcf is an unknown to me but Mel never misses his target. if we extrapolate from 2011, he may exceed his $700M target by $15-$30MM at best.

    All these predictions may still be conservative if the company starts picking up much better sub numbers, and internet/mobile take rate increases dramatically due to the most recent applications and very strong sports line-up.

    It appears we are in for a blast in 2012. There are too many things working for siri now to deny the company long expected success. Great!!! The critical mass is there and we should expect real surprises.

  • Report this Comment On May 02, 2012, at 7:39 PM, HeyHowyudoin wrote:

    It is completely pointless to try an over-analyze this earnings report bump and retraction. It is one of the most predictable movements in stocks I have seen and you can make money from it every time. This time, I bought when it dipped to 2.16, and set my sell limit price Monday night at 2.30 (only missed the top by a penny). Next quarter it will happen again and you will have a new list of BS explaining why. The truth is that a lot of traders much bigger than I will do what I just did on a large scale and make it happen again, like clockwork, and make a killing. I don't know who they are nor do I care (although I would like to thank them), but I'll be here to ride their wave. My only wish is that SIRI would have a weekly earnings report so I could retire. I am long SIRI, but that doesn't stop me from taking profits from time to time and always at earnings time. I know you have to wright about something, and I won't even say that your analysis doesn't have validity, but trust me when I say that nothing you wrote about caused SIRI's price movement over the past week- just like it won't in three months.

  • Report this Comment On May 02, 2012, at 7:40 PM, southernbeachguy wrote:

    $8 Billion in NOLs make Sirus more valuable than they are given credit for. Their Satelittes and Spectrum are also worth $8 Billion....then you have 23million subscribers that provide REOCCURRING REVENUE. Let Bashers say what they want, as for me, I'm holding.

    Keep telling the Sirus Story Rick, good article.

  • Report this Comment On May 02, 2012, at 7:42 PM, HeyHowyudoin wrote:

    Oops, make that 'write'. I don't want my spelling ridiculed.

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