Why It's Hard to Be Bullish on Sirius

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- Investors of satellite radio giant Sirius XM ( SIRI) woke up this morning to news that the company's CEO, Mel Karmazin just recently sold 11 million of his 60 million options for a gain of over $25 million.

Investors have wanted so badly for something to cheer all year and this news has suddenly placed a damper on expectations of its first-quarter earnings report due out on May 1. Astute investors must wonder why any insider would -- much less the CEO -- sell shares only two weeks ahead of the report? If I were an investor, I would question the kind of message that is being sent to the market in terms of confidence -- something that has already been on shaky ground to begin with?

The stock has surged to as high as $2.41 and has gained as much as 30% at one point this year. However, watching the daily price movement offered an indication of where sentiment really is as each increase continues to be met with severe selling pressure.

Some of this is due to the fact that speculation surrounding Liberty Media ( LMCA) continue to run rampant, but in particular, the fact that Liberty is said to be unwilling to pay anything above $2.50 seems enough to convince investors to adopt the thinking of "let me just get what I can." Is it possible that Mel's transactions this week just confirmed this level of thinking? Why would he sell now if he thought there were any chances of selling at a much higher premium?

This news not only just heightened the intrigue that will be the conference call but also establishes what many have perceived to be Sirius' current fair market value. After all, if a CEO sells for an average of $2.20 what will be revealed during the conference call to either inspire investors to buy north of $2.20 and/or prevent a selloff?

At its fourth quarter full-year 2011 announcement the company said that it expected churn to increase slightly by .2% while also suggesting that there was a "modest" response from subscribers regarding its recent base price increase. From that standpoint, I am expecting the subscriber numbers to not be as robust as many are anticipating.

Sirius investors continue to remain positive in spite of all of the negativity surrounding insider sells, Liberty acquisition rumor, suspected subscriber losses and also the all-important, will it raise guidance? I think investors deserve a considerable amount of respect not only for their patience but for their faith throughout all of the noise. However, it is clear that many are waiting for many answers -- either confirmations or denials to many of these questions.

My gut tells me that investors are unlikely to get anything revealed outside of the company's standard operating metrics. Many still forget that Sirius has had a business to run throughout all of this and yet has much to prove.

Although it only projected to 1.3 million subs for 2012, in the upcoming first quarter report, the company will want to demonstrate that it did indeed lowball guidance and the initial number was not the lack of confidence that it was perceived to be. I think if it can report 420 to 460 thousand for first quarter, it would put the company ahead of its pace for its full-year projections. However, I don't believe that this number would not be enough to justify raising guidance because churn of 2.1% is expected to play a major role in its performance.

That said, the more important metrics will be to see how it is doing in its rate of conversion. This number typically arrives at the 44% range but I'm curious to see what effect (if any) its price increase has had on its ability to lock in subscribers upon the expiration of the promotional trial period. From a revenue standpoint, the price increase will help offset subscriber losses to some degree as Sirius expects growth in that area for the year to arrive at 10% to $3.3 billion.

From an investment perspective, it is hard to be bullish on the shares knowing that the CEO has 49 million shares left that he can unload at any time. When you couple this with the fact that the stock typically sells off after earnings, it is hard to make a case for adding at current levels.

If you are long at the moment and your holding period is through this year, I would wait until after the call to add to your position if your risk tolerance is high. However, if you are in the money at the moment, I would sell ahead of the announcement and wait for the pullback to re-enter a position at the $2.10 range.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

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