Is Sirius XM a Buffett Stock?

Warren Buffett attracts a lot of attention. As the world's third-richest person and most celebrated investor, thousands try to glean what they can from his thinking processes and track his investments.

While we can't know for sure whether Buffett is about to buy Sirius XM (Nasdaq: SIRI  ) -- he hasn't specifically mentioned anything about it to me -- we can discover whether it's the sort of stock that might interest him. Answering that question could also inform whether it's a stock that should interest us.

In his most recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size, proven management, and a reasonable valuation, he demands:

  1. Consistent earnings power.
  2. Good returns on equity with limited or no debt.
  3. Management in place.
  4. Simple, non-techno-mumbo-jumbo businesses.

Does Sirius XM meet Buffett's standards?

1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.

Let's examine Sirius XM's earnings and free cash flow history:

Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.

Over the past five years, Sirius XM had a difficult time producing earnings and free cash flow. However, that's changed since fiscal 2010, and the company is now profitable.

2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it actually is.

Since competitive strength is a comparison between peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.

Company

Debt-to-Equity

Return on Equity (LTM)

Return on Equity (5-Year Average)

Sirius XM Radio

612%

70%

N/A

Apple (Nasdaq: AAPL  )

0%

42%

30%

Motorola Solutions (NYSE: MSI  )

32%

7%

0%

Pandora (NYSE: P  )

68%

0%

(42%)

Source: Capital IQ, a division of Standard & Poor's. N/A = not applicable due to negative equity one or more years.

Having recently turned profitable, Sirius XM generated an enormous return on equity, though that is due in large part to the company's substantial debt.

3. Management
CEO Mel Karmazin has been at the job since 2004 (when it was just Sirius Satellite Radio). Prior to that, he'd spent several years at other broadcasters, including CBS and Viacom .

4. Business
Fans of Sirius will point to the lack of meaningful direct competition in the satellite radio industry, but the medium is new and could be vulnerable to technological disruption from indirect competitors.

The Foolish conclusion
Regardless of whether Buffett would ever buy Sirius XM, we've learned that while the company has tenured management, it doesn't particularly exhibit some of the other characteristics of a quintessential Buffett investment: consistent earnings, high returns on equity with limited debt, and a straightforward industry.

If you'd like to stay up-to-speed on the top news and analysis on Sirius XM or any other stock, simply click here to add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks by clicking here.

Ilan Moscovitz owns shares of Apple. You can follow him on Twitter @TMFDada. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple, as well as creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On August 05, 2011, at 2:39 PM, cajun021 wrote:

    I completely agree SIRI is not a Warren Buffett stock by any means. You could also add to the list that its a penny stock. Im not sure he buys anything less then $30/share. I may be incorrect, heck it might be higher.

    Unfortunate for me, Im not as smart as Warren Buffett, I do own this stock. I could give many reaston as to why, but that would be like beating a dead horse. Safice to say, I understand the risk I am taking. After owning the product for a while I realized I might as well invest in the product too. I am confident that eventually SIRI will be more consistant in thier growth over time. The only certainty of this particular stock is its not suited for everyone.

    Enjoyed reading the artical.

  • Report this Comment On August 05, 2011, at 5:01 PM, waterinfo wrote:

    On balance, I believe that SiriusXM is a stock that Buffet would look at Siriusly (pun intended).

    However, it might very well be too high tech for him, as well as he, like many others might not really want a stock with so many, all be it, weak competitors in the business of music delivery. What is not well understood, is the SiriusXM has a business model that goes way beyond "MUSIC" delivery. In the meantime, SiriusXM has a variety of characteristics that are consistently present in stocks that maintain high growth for many years.

    In the January 2011 edition of Smart Money Magazine (published by the Wall Street Journal), editor James Stewart wrote an article about 100 baggers........stocks that can turn $10,000 in a $Million.

    Using examples like Wal-Mart, St. Jude Medical, Home Depot, Microsoft and Intel he lists the following attributes for potential 100 baggers.

    1. Unusual competitive advantages, often gained by being first or early into a new market, and a business that has a high cost of entry.

    2. Companies with full or near monopolies where they can legally dominate a market.

    3. High profit margins than don't erode easily.

    Mr. Stewart points to Google, Vale, Baidu, Wynn Resorts, Salesforce.com, and First Solar as companies with these attributes.

    If you have been reading any of the other posts on this website, I think that you know where I'm going. SiriusXM has these attributes in spades.

    Now, you might argue, had you invested in SIRI a little less than two years ago, when you could have bought as many shares as you wanted for 15 cents or less, you already have a ten bagger, and getting to $15 per share from here would make it a 100 bagger. However, very few of us (certainly including me) had the courage to invest a sizable amount of many into a stock that was a weak breath away from bankruptcy.

    However, now that SIRI is on a solid financial footing, can it be a 100 bagger from here?

    Let's look at Mr. Stewart's key attributes.

    1. SiriusXM's competitive advantage is huge, given that to directly compete you would have to spend hundreds of millions of capital on satellites, and hundreds of millions securing talent. Despite my technical background, I'm not sure whether or not it would be feasible for Dish or DirectTV to use any of their capacity to initiate a radio service without launching additional satellites. I frankly doubt it, but even if they could, they would still have a very big obstacle in securing talent and listeners. Music only services, like Pandora are a mere shadow of the capabilities of SiriusXM.

    2. It took a while, almost too long, for the government to agree to the Sirius and XM merger, giving SiriusXM not only a natural monopoly (on satellite radio distribution) but a monopoly "blessed" by the key government entities (Federal Communications Commission, Federal Trade Commission, and Securities Exchange Commission) that could have blocked it.

    3. As a service business, with monthly recurring revenue SiriusXM has very high profit margins on existing customers (e.g. an existing customer uses no resources once signed). There are some customer acquisition costs, but those are rapidly decreasing, and some customer turnover, but, by my estimate, at least 70 cents of every new revenue dollar can drop to the bottom line. CEO Karmizan, in the recent conference call forecast and overall operating margin of 40%, but I believe that is conservative. Moreover, it is a recurring revenue that is negligible to most customers. (For most customers, a 30 cent per gallon change in the price of gas costs them more than a their SiriusXM subscription). Also, looking at the satellite TV model for some possible guidance, my DirectTV subscription in 2000 was $27.95/month. My DirectTV subscription in 2011 now costs me well over $100/month. Some of that is for price increases, but most of it is for additional receivers and additional services. SiriusXM will enjoy the same "revenue creep" as they raise prices a tiny bit at a time, and as customers like me, add additional receivers (I'm already up to my third XM receiver, and about to add a fourth).

    So let's summarize........a competitive advantage, a monopoly market, and non-eroding, growing revenue base and margins. In addition, unlike Wal-Mart, St. Jude Medical, Home Depot, Microsoft and Intel, SiriusXM does not have to sell new products to existing and new customers every year. SiriusXM customers pay for the same product, a month at a time, often for a lifetime. You have to love "recurring revenue" businesses.

    SiriusXM Sounds like a 100 bagger to me, even starting from $1.80/share.

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