Is Sirius XM Seriously Wasting Its Cash?

Source: Sirius XM Holdings

One of the more interesting investment opportunities in recent years has been Sirius XM Holdings (NASDAQ: SIRI  ) . In light of higher sales and rising profits, shares of the satellite radio provider have soared 2,750% since the end of 2008 from $0.12 to $3.42.

Since the end of 2012, however, slowing sales growth and a high P/E multiple have resulted in the company's stock climbing just 18% while the NASDAQ Composite, Sirius' benchmark index, has skyrocketed 47%. In an effort to appease shareholders, including Sirius' largest shareholder Liberty Media (NASDAQ: LMCA  ) , management has begun buying back stock at record numbers. $4 billion later though, it seems that the buyback party is just beginning.

Sirius has been doling out some serious cash!
In Dec. 2012, Sirius announced a $2 billion share repurchase plan aimed at buying stock from investors who want out of the game and consolidating ownership in the hands of those who believe the company still has room to run. After a failed buyout attempt of the company by Liberty Media in Oct. 2013, management announced a further buyback plan amounting to $2 billion.

Date Amount Authorized Total Balance Remaining
Dec. 2012 $2 billion $109 million (March 2014)
Oct. 2013 $2 billion $2.109 billion (March 2014)
Jul. 2014 $2 billion $4.109 billion (Jul. 2014 est)

Source: Sirius XM Holdings

As part of its second authorization, Sirius agreed to buy back not just the shares of individual investors, but also at least $500 million worth of stock from Liberty Media. Of this amount, $160 million was acquired by the end of 2013, with the remaining $340 million being acquired on April 25, 2014. Even after the completion of this transaction, however, Liberty Media still owns in excess of 50% of Sirius' outstanding shares.

Now, in spite of having $2.1 billion still available under its previous authorizations, Sirius believes it's time to keep the ball rolling with its just-announced buyback. According to the company, it can complete these buybacks through the open market, private transactions like it did with Liberty Media, and accelerated stock repurchases where management can acquire large amounts of stock at a time.

Where is Sirius getting all this cash from and is there a better alternative?
Even though business growth is slowing, as evidenced by the modest 6% increase in subscriber count from 24.4 million in the first quarter of 2013 to the 25.8 million reported this year, Sirius' free cash flow has been on a tear. Between 2009 and 2013, the company's free cash flow soared 401% from $185.3 million to $929.2 million. In part, this has been due to net income growth, which has increased from a loss of $352 million in 2009 to a gain of $377.2 million last year, but other factors have included depreciation and amortization, and increases in the business's deferred taxes.

While it's nice to be able to consolidate ownership, there are better things to do with significant amounts of cash on hand than buy back shares. One option is for the company to invest in growth initiatives, whether it be organically driven, or acquisition-based. Unfortunately though, growth isn't always an option, especially as Sirius' market is showing signs of maturity. Another possibility is for management to pay off debt, something Sirius has plenty of.

Source: Liberty Media

As of the end of its 2013 fiscal year, Sirius had $3.1 billion in long-term debt. On this debt, management paid $204.7 million in interest for the year, which equates to a weighted average interest rate of 6.6%. Fortunately, the company has made a habit of refinancing older, higher-cost debt with new, lower-cost debt, but during its most recent quarter, the $54.1 million paid on $2.9 billion in debt indicates that there company's borrowing costs still remain high. Instead of buying back shares at a time when earnings are still low in relation to sales, management might be better off paying down its costly load of debt, thereby increasing profits in the long run.

Foolish takeaway
There's no denying that Sirius has been a strong growth story in recent years and, in light of lackluster growth opportunities, management has elected to do something it sees as productive with its cash. In the long run, soaring profits would likely be met with skyrocketing share prices, but at a time when earnings are still low and the company is still trading at 57 times 2013's net income, management might be better off to use its excess cash to reduce debt outstanding. On top of increasing profits and free cash flow in the long run, this approach will reduce the risk of adverse conditions down the road should Sirius' business be hit by a downturn.

Could Apple's next device put Sirius on your wrist or in the dump?
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device, which could make playing Sirius even easier or could very well make the company's products and services obsolete, was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year.   But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Read/Post Comments (3) | Recommend This Article (3)

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  • Report this Comment On July 17, 2014, at 11:02 AM, sirifair6 wrote:

    Daniel,

    I am 100% of the opposite opinion of yours. Sirius XM has no choice other than buyback shares. I am surprised why you have not mentioned how many share siri had before the buyback program got started - whopping 6.9B including the 270M converts due at the end of 2014. This is an obscene number of shares that a company of a relatively modest revenue cannot, should not and must not live with.

    You are wrong in virtually of all aspects of your assessment of siri. First, last year the company made a $530M acquisition of an Agero vehicle connectivity business that is a perfect fit for siri.

    Second, I do not understand where your slow down of the business premise comes from. Yes, Q1, 2014 sub growth was unusually low...but financial metrics that matter, that is revenue, EBIDTA and particularly fcf showed zero slow down. Revenue was $2M shy of $1B (11% yoy); EBIDTA was $335M vs. $262M in Q1 2013; and fcf was $223M vs. $143M in Q1 2013, and you call this a slow down. I wish all companies could demonstrate 56% fcf growth yoy.

    To conclude, you are flat wrong about you vision of siri's business and what they need to do. With projected $1.1B fcf for 2014 for them to handle the meager annual interest of about $230M is a child's play. Their earliest debt mature in 2020, their capex is minimal for another 30 months and the borrowing is still very cheap. Not to borrow this money to buyback ridiculously and unjustifiably cheap stock is outright stupid, or you can call dumb or highly unprofessional.

    The company is on a clear path of very strong growth with huge catalysts being the used car market and connected car where they are just scratching the surface. With the announcement of raising the buyback amount to $6B the company has removed a lot of uncertainty. I will be even happier once the stock crosses $4 and liberty joins the buyback program. I predict that in the next two years the company will allocate another $4B for buybacks

  • Report this Comment On July 17, 2014, at 2:39 PM, Guggerpaul wrote:

    With interest rates so low and Siri so undervalued they would be foolish not to be buying shares back. In my opinion this is the best possible use of funds at this juncture.

  • Report this Comment On July 17, 2014, at 2:45 PM, Guggerpaul wrote:

    Oh and by the way, last quarter they spent revenues to buy back stock so earnings were artificially low and therefor pe was artificially high. every quarter it seems they do something to prevent revenue from trickling down to the bottom line to keep earnings low to depress pps for the buy back. at some time they will turn it loose and we will explode to the up side.

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