There's a new Sirius XM Radio (NASDAQ:SIRI) investor, and it's one that would've seemed unlikely just a couple of years ago. Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) initiated a position in Sirius XM according to a new Securities and Exchange Commission filing last week.
Berkshire Hathaway closed out the year with 741,547 shares of Sirius XM. Yes, Warren Buffett is now an investor in a stock that attracted mostly penny-stock speculators in the past. It's a smart move for Berkshire Hathaway, and obviously it validates Sirius XM's success story. Let's take a look at some of the reasons why arguably the greatest investor of our time is finally buying into the top dog in satellite radio.
1. Cash flow speaks volumes
Buffett may or may not be a fan of Howard Stern. He may not even be one of Sirius XM's 31.3 million subscribers. However, the one thing that Buffett knows is the value of a big business that generates an even bigger amount of cash.
Sirius XM is a money machine. It generated $1.32 billion in free cash flow in 2015, and topped $1.5 billion last year. Its guidance calls for another $1.5 billion in free cash flow this year, and this is a company that has historically been conservative with its guidance.
Folks are paying big money for premium radio, and the business clearly works.
2. Slow and steady wins this race
It's not fair to call Sirius XM speculative these days. Sirius XM has been consistently profitable for years. Top-line growth has been steady, with revenue growing between 9% and 13% in each of the past five years.
Buffett loves steady and predictable businesses, and that's exactly what Sirius XM has become. The scalable model is a well-oiled machine, and net income has grown faster than revenue in five of the past six years.
3. Buffett likes big moats and he cannot lie
Antitrust regulators may have approved the combination of Sirius and XM nine years ago, but it's essentially a monopoly when it comes to satellite radio. There is certainly no shortage of competitors in the realm of audio entertainment, and the birth of the connected car has cracked open the marketplace for streaming apps. However, Sirius XM is the undisputed champ of premium radio.
It can get away with charging $15.99 a month to tens of millions of subscribers because the growing number of cheaper alternatives aren't as appealing. Sirius XM offers seamless coast-to-coast access to premium content for drivers, and the competition isn't even close. Buffett loves market leaders that own their niche, and that's Sirius XM with its healthy moat.