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Sirius Shareholders Get Everything but Share Price Increase

Stocks in this article: SIRI

NEW YORK ( TheStreet ) -- With today's earnings, 22 million Sirius (SIRI) perma-bull shareholders finally received what they anxiously awaited for. First quarter was a dream quarter for investors that should have shareholders dancing in the street singing praises for CEO Mel Karmazin.

The top line revenue increased more than 11% year-over-year resulting in more than $804 million in the first three months of the year. $804 million may not be a relatively big beat compared to the mean estimate of $803, but Mel Karmazin has done a remarkable job navigating through the challenges to bring home another winner quarter.

Monthly churn has dropped to 1.9% and even auto sales are now cooperating to bring the total subscribers up to a record 22.3 million. Net income is up almost 40% meeting Wall Street's expectations of $0.02 per share.

Chris Ciaccia wrote an interesting article highlighting various ways Sirius may use its new found cash flow. With Liberty Media already the largest shareholder, it would not take much to gain total control of the company board. Also, be sure to click on the link below in regards to Liberty Media and Sirius.

With today's earnings, many investors are likely scratching their heads and collectively asking why the stock is not trading higher. The quick answer is the revenue, earnings, subscriber growth and future guidance was already priced in.

What so many don't understand is Sirius is not your everyday run of the mill "here today and maybe gone tomorrow" sub $5 stock. Most stocks trade for under $5 because the market has lost confidence in the company's ability to generate a reasonable return. Sirius is somewhat unique as a result of a combination of near bankruptcy, merger with XM, massive numbers of retail investors, and the lifeline sweetheart deal from Liberty Media.

Paint by numbers. Let's take a look at the first and arguably the most important number to investors, the bottom line. Sirius earned about 2 cents for the quarter and given Mel Karmazin's growth guidance of 1.5 million up from 1.3 million we can use 2 cents as the bottom number for 2012. Unfortunately, it's difficult to move from 2 cents to 3 cents using large numbers like Sirius does, because it represents a 50% increase in profits. To make it easier we will go with $0.025 for third and fourth quarters.

If we add up the first half of the year we have a profit of 4 cents and the second half of the year gives us 6 cents for a total of 10 cents in 2012. It's debatable if Sirius will make 10 cents this year, however what is not debatable is if Sirius does make a dime the stock will be trading at an earnings multiple of over 22. I consider anything over 20 to be expensive due to the historical poor performance of stocks trading over a P-E ratio of 20.

To put it another way, without massive growth expectations, Sirius should not be trading anywhere near the price it was before earnings. Today's earnings may bring the share price closer to a more reasonable valuation, but not through the doorway of reasonable valuations.

At 9 cents earnings for 2012 the numbers get significantly worse with a P-E ratio over 25. I understand many are hell bent on retaining the shares they bought for a fraction of the current price. As long as the bottom doesn't fall out, it actually makes sense. At the same time, it's abundantly clear if a stock doesn't move higher on good news, what the share price will do on bad news.

To get an idea of the relevant difference and how much more expensive Sirius is compared to other well-known companies let's look at a few:

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