It’s Time to Buy More Sirius XM

In its latest earnings report, Sirius XM (NASDAQ: SIRI  ) reported solid fundamentals and growth, but the market yawned. Sirius performed not only on the operational side of the business, but on the financial side, too. The company bought back 6% of its outstanding shares, and the company now trades at a very reasonable 19.5 times this year's projected free cash flow. And John Malone – the man behind Sirius's majority owner Liberty Media (NASDAQ: LMCA  ) – will continue to undertake an ongoing leveraged recapitalization. That means more buybacks are on the way, creating even more value for shareholders. That's why my Special Situations portfolio is buying more Sirius.

A solid second quarter
Sirius continued to show good growth in the second quarter, and management raised expectations for the full year. Revenue was $1 billion, up 10% year over year. That was driven by 475,000 net new subscribers, and the subscriber base grew 5% from year-ago levels, to 26.3 million.

Adjusted EBITDA climbed 31%, to $370 million. Free cash flow grew 42%, to $335 million. And with more than $1 billion in share repurchases, free cash flow per share soared even faster, up 47%.

But let's back up to those repurchases, which are really helping to drive value for shareholders. In 2014, Sirius has already repurchased $1.6 billion in shares, including a massive 6% of its share count in just the second quarter. With more than $2 billion remaining on its repurchase authorization, I expect the company will continue to aggressively buy back stock. It still has a fully untapped $1.25 billion credit line.

So what price are we paying for this performance. Using fully diluted share count of 6.2 billion shares, the market cap comes to $21.2 billion. With expected free cash flow for 2014 of $1.1 billion, investors are paying a little over 19 times for this cash machine. If we assume another $2 billion in buybacks at an average price of $3.50, then Sirius today is trading at 17.5 times free cash flow.

And while Sirius's leverage target is now 4 times EBITDA, it won't surprise me to see that inch up to 4.5 times in the next year. That would allow more room for buybacks. So there's still a lot to like about Sirius. And with Liberty Media not selling into the buyback, that Malone entity becomes an increasingly larger majority owner of Sirius. So you see there's more than one way to take over this satrad superstar. For more on Sirius, follow me on Twitter: @TMFRoyal. And check out my dedicated discussion board.

Foolish bottom line
So with that performance, my Special Situations portfolio will be acquiring another $500 in Sirius stock on the next market day. The long term still looks on track and the stock should return very good returns for shareholders from today's price.


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