Sirius Investors Suffer From Selective Amnesia
A lot of that has had to do with the fact that the stock has not reacted, as it has in the past, leading into its quarterly announcement. There has always been a typical jump (at least) 10 trading days ahead of the report. Instead, investors have had to deal with the realities of insiders and, in particular, CEO Mel Karmazin, who sold 11 million shares last week at an average price of $2.20 for a profit of $25 million.
What struck me as odd was not the fact that Karmazin sold his shares. That was known -- he wanted to fund his charitable causes, a noble gesture. But, remarkably, some investors continue to think that the intent of the sale somehow applies a separate disclaimer to the 11 million new shares that just flooded the market, essentially "Yes, he sold, but ..."
It was disappointing to hear the howls resonating from Sirius longs suggesting "thank you for your shares, Mel!" The only logical conclusion from which I can draw from those remarks was: "Can these investors walk and chew gum at the same time?" I'm not convinced they can.
Since reaching a 2012 high of $2.41 on April 2, the stock has lost as much as 12%, dropping to $2.11 on Monday. My gut tells me that Netflix's report (another subscription service) has had a lot to do with the recent bearishness on Sirius.
Rising gas prices have hurt not only consumer confidence, but also companies such as Sirius, which rely on discretionary spending. Upon the release of Netflix's first-quarter earnings report, the stock dropped 14%, the biggest decline since October.
What bothered Netflix investors (many of whom deserve a considerable amount of credit) is that they now see the light and understand that the company has significant headwinds with growth. The company said subscribers would drop considerably in the current quarter. Netflix is now focusing on "making money" rather than growing subscribers. It has essentially admitted that subscriber growth has (for all intents and purposes) stopped.
That is yet another correlation between the two companies, as Sirius has consistently evaluated its success on increasing subscribers rather than the bottom line. For Netflix, as disappointing as the report was, at least it now plans to focus on what really matters: earnings per share.
Expectations for the quarter
The question is, why haven't Sirius investors used this information to plan adequately for what might be a disappointing quarter? Growth of car sales isn't everything. It is interesting how Sirius investors were ready to compare the company to Netflix when Netflix was trading in the $250s and heading over $300. But now, somehow, there is "no comparison." As the company reports first-quarter earnings next Tuesday, astute investors need to asses if there is a Netflix-type scenario that may unfold.
At its fourth-quarter and full-year announcement, Sirius said it expected churn to increase slightly, by 0.2%, and that there was a "modest" response from subscribers regarding its recent base-price increase. From that standpoint, I am expecting subscriber numbers not to be as robust as investors are anticipating, even though Sirius said in February it planned to add 1.3 million subscribers in 2012, a figure widely regarded as low.
But I am now inclined to believe that, just maybe, it knew then what it was talking about. So as Netflix demonstrated what a challenge it continues to be to grow subscribers in the face of rising household budgets, I don't expect Sirius to raise its subscriber guidance for the year, at least not until it has sufficient visibility into this current quarter. Investors of Sirius should embrace the reality that the company is yet similar to Netflix and use what is known to beat the market -- hence walking and chewing gum at the same time.
The bottom line
From that view, I think an increase of 420,000 to 460,000 subscribers for the first quarter would represent a slight victory for the company, a number that would put it ahead of its expected full-year pace. But that wouldn't be enough to please Wall Street. I expect shares to drop on the news to less than $2.10 and possibly even to around $2.00, unless the company reveals dynamics regarding its CPO program or partnerships with used-car dealers.
From an investment standpoint, I would be a seller of the stock at any signs of strength ahead of the announcement and wait for a possible 10% pullback before re-entering a position.
At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.