The Marley Group

Following today’s closing bell, Sirius (SIRI) announced that they were cutting their year end subscriber forecast to between 5.9 million and 6.1 million, down from previous guidance of 6.3 million subscribers year end. The updated guidance range represents total net additions of nearly 2.6 million to 2.8 million in 2006. They continued on to reiterate that the company’s first quarter of positive free cash flow may be reached as early as this quarter.

This is obviously bad news for Sirius, but the real question is how will it be received by the markets. In after hours trading, shares last exchanged hands at $3.99, down $0.18, a relatively small drop. Given the recent downgrade by Wachovia and negative research note from Bank of America analyst Jonathon Jacoby, the street may have actually been anticipating this event. The lackluster reaction to the companies positive Q3 report, in which they reaffirmed their guidance of 6.3 million year-end subscribers, further supports our view that many viewed their original estimates as overinflated.

If investors had foreseen this guidance revision, that would mean that a good deal of this news had already been priced into shares of Sirius. Also, while their subscriber forecast was reduced they maintained their time frame for achieving cash flow break even, going as far as saying, “We have consistently focused on disciplined growth and continue that focus as we look to generate positive free cash flow this quarter.” Given these two points, we advise against taking the guidance revision as reason for taking a short position in Sirius tomorrow, given the unfavorable risk to reward ratio presented by such a trade. Wait for the dust to settle around this announcement before acting upon it.

Disclosure: Joseph Urgo does not have a position in Sirius.