Warren Buffett is one of the most successful investors of all time. So when he backs a particular company, it pays to find out why. The billionaire's holding company, Berkshire Hathaway, has thrown its weight behind Sirius XM ( SIRI 0.24% ) and Kroger ( KR -2.27% ). Let's explore the reasons why Buffett might be bullish on these stocks.
Sirius XM: Betting on an automotive recovery
Sirius XM is the leading satellite radio company in the U.S. It has a virtual monopoly over the market, although it still competes with terrestrial radio. The company fits well into Buffett's portfolio because of its strong moat and reasonable valuation of 27 times earnings (compared to the S&P 500 average of 36). Sirius can drive future growth by boosting its installation rate in new cars.
Revenue grew 1% to $2.03 billion in the third quarter, as the coronavirus pandemic continues to slow down new car sales, an important driver of satellite radio installations. U.S. auto sales fell by 9.4% to 3.9 million vehicles in the period, but Sirius helped offset this challenge by boosting its new car penetration rate to 78% -- up from 72% this time last year.
Sirius expects to push its penetration rate as high as 80% through new OEM agreements with car manufacturers. The company expanded its agreements with GM and BMW in the third quarter. And in October, it inked a new installation deal with Kia, aiming to put SiriusXM hardware in nearly all of the automaker's vehicles sold to consumers in the U.S.
Management is guiding for full-year revenue of $7.85 billion in 2020, which is less than 1% above the prior-year figure. That's not too shabby, considering what a challenging year it's been due to the pandemic. Sirius also expects to generate adjusted EBITDA of $2.48 billion this year, which will help fund its aggressive buyback strategy.
Kroger: A digital transformation
Kroger is a 137-year-old American grocery chain with a new lease on life as its e-commerce operations gain speed. The company is the quintessential Warren Buffett stock because of its super low price-to-earnings (P/E) multiple of just 10. Investors should consider betting on Kroger because of its digital transformation and potential for sustainable dividend growth.
According to CEO Rodney McMullen, Kroger customers are now making fewer visits to physical stores but spending more per visit. They are also increasingly shopping online, allowing Kroger to scale its e-commerce strategy. The company is positioned for success (as far as logistics is concerned), because it boasts over 2,100 pickup locations and 2,400 delivery locations, reaching 98% of its customer base.
Kroger is further boosting its fulfillment capabilities through automation. The company has partnered with Ocado -- a British grocery software and robotics company -- to build highly efficient automated warehouses around the country. Kroger plans to open its first two Ocado sites in the spring of 2021, with plans for a total of 20 locations.
Kroger's sales rose 8.2% year over year to $30.49 billion in the fiscal second quarter, while adjusted earnings per share (EPS) jumped 66% to $0.73. For the full year, management is guiding for sales growth (excluding fuel) of over 13% along with EPS growth of 45% to 50%. The company generated adjusted earnings of $2.19 per share in 2019 -- which provides plenty of coverage for its $0.18 per share quarterly dividend ($0.72 annually). The stock now yields 2.2% and has grown its payout for 14 consecutive years.
Betting on value
Warren Buffett's investment philosophy focuses on value stocks -- companies that trade at relatively low multiples compared to their earnings and growth potential. Both Sirius XM and Kroger seem to fit the bill, but they have different strategies for returning value to investors.
Sirius XM is ideal for investors who appreciate buybacks (which can help boost share prices), while Kroger is better for investors who prioritize a sustainable dividend payout that can grow larger over time.