Is Sirius XM a Buffett Stock?

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

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 -- but we can discover whether it's the sort of stock that might interest him. Answering that question could also reveal 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: S&P Capital IQ.

Over the past several 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 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.


Debt-to-Equity Ratio

Return on Equity

5-Year Average Return on Equity

SIRIUS XM 493% 62% N/A*
Apple 0% 42% 34%
Motorola Solutions 35% 9% 0%
Pandora 0% (13%) (42%)

Source: S&P Capital IQ. *Negative equity for one or more years.

Since turning profitable, Sirius XM has been producing an enormous return on equity, though that is due in large part to the company's sizeable debt load.

3. Management
CEO Mel Karmazin has been at the job since 2004 (when it was Sirius Satellite Radio). Before 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. To stay up to speed on Sirius XM's progress, simply add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks.

Ilan Moscovitz doesn't own shares of any company mentioned. You can follow him on Twitter , where he goes by @TMFDada. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

Read/Post Comments (5) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 03, 2012, at 5:28 PM, sirifire wrote:

    And as the result Warren Buffett would not invest in Microsoft and Apple and Facebook. Should I continue? We do need to be humble but not to the extent of being copycats.

    Now about the qualities of Sirius XM that has been in existence since July 2008, that is 3.5 years. The company has been consistently profitable for 2 years and will be profitable in the foreseeable future. And not just profitable but rather very profitable with margins reaching 40% and higher.

    I do not know where you got this debt to equity ratio of 493%. I would love to see the basis for your calculation.

    Management is very strong as will be confirmed by 2011 FY results.

    Siri’s business is absolutely unique with close to fixed costs. Once the company reached a certain threshold of income, about seventy cents of additional dollar goes to the bottom line. This year alone Sirius should add about 1.6M subs. You do not have to be a rocket scientist to figure out that going forward the company will be producing very high margins.

  • Report this Comment On January 03, 2012, at 11:26 PM, Austin77478 wrote:

    Another surreptitious attack on Sirius!

  • Report this Comment On January 04, 2012, at 12:48 AM, ctsolomonmd wrote:

    I have always liked sirius. I love the product and I think a strong captain of the ship will navigate a company going forward. Mel Karmazin is strong and has vision. I have given 7 lifetime subscriptions to people and they all love the product. The company has overcome a lot. They are not perfect. The merger leaves something to be desired as a consumer who has been loyal and does not feel the love with my car that has XM and not sirius. This is still a problem. It wont be easy but they should continue to grow market share in Automobiles, mobile devices: smart phones, ipad, i touch, i phone, android apps with strong broad spectrum content.Terrestrial Radio is dead. They have one thing over other technology which is strong programming from politics and entertainment to all major sports with limited commercials I have owned this stock for many years and have added to the position at many different times. I think they will thrive and move into a strong growth phase but is has been and may continue to be a slow pace with early slippery footing.

  • Report this Comment On January 04, 2012, at 5:03 AM, hanks88 wrote:

    SIRI will be $8 as high as $12 by year-end.

  • Report this Comment On January 04, 2012, at 6:31 PM, ctsolomonmd wrote:

    From your lips. I hope you are right. The car industry is coming back and the mobile product works well but so far lackluster.

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