"Why would a reverse split be bad for Sirius?" I asked last week. I proposed that Sirius XM Radio
In response, a few of you let me have it.
Arguments against the reverse split generally fall along one of the following lines:
- Several companies have more shares outstanding than Sirius XM.
- It is easier for a stock to double from $1 to $2 than to go from $10 to $20.
- A reverse would increase short positions.
- Shareholders who are also subscribers would cancel their accounts in protest.
- Reverse splits have been failures, historically.
Some of these points are serious considerations, but many of them just don't add up.
1. Shares outstanding
Let's start by debunking the myth that there are presumably "hundreds" of companies with more outstanding shares than Sirius XM.
Now that Sirius XM has rattled off back-to-back breakeven quarters -- with analysts expecting more of the same through the rest of the year -- the 40% preferred share stake from Liberty Capital
How many stateside companies have more than 6.5 billion shares outstanding? The country's most valuable company does not. In fact, just two of the country's largest companies by market capitalization -- Microsoft and General Electric -- have a greater number of shares outstanding.
2. The starting-line fallacy
Is it easier for a $1 stock to double than it is for a $10 investment? Perhaps -- just as it's easier for a $1 stock to go to $0.50 than it is for a $10 company to hit $5. The market's biggest winners and losers tend to be low-priced stocks, so I won't deny that there's greater near-term volatility for stocks with lower price tags.
However, this typically applies to small- and mid-cap companies. Sirius XM won't go from $1 to $2 -- or from a market cap of $6.5 billion to $13 billion -- on a stellar quarterly report next month. Despite any speculative fluctuations, a stock is ultimately accountable for what it's truly worth.
This doesn't necessarily mean that high-priced stocks are slackers. Baidu
Let's also consider priceline.com
3. The short story
There were 109.7 million shares of Sirius XM sold short when the month began, a 33% spike from the short interest just two weeks earlier -- and a whopping 92% more than were in place when the year began. It may be true that it's harder to short low-priced stocks, but clearly, it's happening with Sirius XM.
I don't approach the bearish wagers pessimistically. A large short position can even be a positive. If fundamentals continue to improve, short squeezes may prompt naysayers to cover their positions, typically propping shares higher.
4. Incensed shareholders will cancel their subscriptions
CEO Mel Karmazin had no problem getting shareholders to approve a reverse split last summer. Why should this year be any different, if Sirius XM gets up to the June 30, 2010 expiration of the original authorization?
Shareholders who think their fellow investors unanimously oppose a reverse split may want to check the voting record.
5. We're history, so let's split
It didn't matter that I pointed out last week that the three largest companies to declare reverse stock splits last year are trading higher today. And no one seems to care that E*TRADE Financial
The "reverse stigma" is toast. Biglari Holdings
The great wall of zeroes
Sirius XM investors are seeing a lot of zeroes these days. The satellite radio giant earned $0.00 in each of the past two quarters, and analysts see Sirius XM continuing that streak of zeroes for the next two quarters and the rest of 2010.
Sirius XM may very well be growing during that stretch, but with 6.5 billion shares outstanding, it'll take $65 million in profits to move earnings per share higher by a single penny.
Wall Street sees Sirius XM earning $0.02 a share come 2011, and again, that's a wide window of possibilities. In the end, it doesn't matter whether Sirius XM earns $0.02 a share on 6.5 billion shares, or $0.20 on 650 million shares -- the math remains the same. In terms of market cap, so does the float.
Why deny Sirius XM the right to woo price-wary institutional investors, or to replace some speculators with investors? Wouldn't it be refreshing to see reasonable option strike prices? If the reverse math frightens you, then you're probably uncomfortable with Sirius XM's present valuation.
That's not my problem. I think Sirius XM's performance over the past few quarters proves that it'll have a bright future. However, anyone who thinks that a reverse split will hold the satellite radio star back from an epic surge hasn't thought through what it would take to justify a market cap north of $30 billion with the company's present business model.
I'm still waiting for an argument to sway me away from backing a reverse split. If you fear that the process would cool Sirius XM's speculative sizzle, aren't you essentially arguing that rational market would deem Sirius XM overpriced at its current valuation?
With bulls like that, who needs bears?
Microsoft is a Motley Fool Inside Value choice. Baidu is a Motley Fool Rule Breakers selection. priceline.com is a Motley Fool Stock Advisor recommendation. Motley Fool Options has recommended a diagonal call position on Microsoft. Try any of our Foolish newsletter services free for 30 days.
Longtime Fool contributor Rick Munarriz is a subscriber to both Sirius and XM. He does not own shares in any of the stocks in this article. He is also a member of the Rule Breakers analytical team, seeking out the next great growth stock early in its defiance. The Fool has a disclosure policy.