One of the market's better turnaround stories is Sirius XM Radio (SIRI 1.65%). The satellite radio provider was on the brink of bankruptcy a dozen years ago as regulators dragged their feet in getting the combination of Sirius and XM approved. John Malone's Liberty Media stepped in to provide financing in a pinch, and Sirius XM has been a 124-bagger since the shares bottomed out at $0.05 -- yes, a nickel -- in early 2009.
Liberty Media's arrival eventually opened the door for investors to get into the country's lone satellite radio company at a discount. It was given a 40% preferred share stake in Sirius XM as part of the 2009 financial bailout, and it has increased its position to where it's now an 80.2% stake. Liberty Media split into several tracking stocks, with Liberty SiriusXM (LSXMA 1.83%) (LSXMB -1.87%) (LSXMK 1.87%) backed by its majority stake in the radio giant.
Retail investors generally prefer Sirius XM Radio stock as the more straightforward play in the broadcaster's empire, but a lot of value-minded institutional investors -- including Warren Buffett -- tend to favor the tracking stock. Liberty SiriusXM has historically traded at a roughly 25% to 30% discount to the value of its stake in Sirius XM Radio. It seems like an obvious way to grab the satellite radio provider at a discount, but there's a pretty big catch.
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Checking out isn't as easy as checking in
Grabbing Sirius XM for $0.70 or $0.75 on the dollar may seem like a good idea, but not everyone on Wall Street sees it that way. Liberty SiriusXM was downgraded by Morgan Stanley's Benjamin Swinburne on Thursday morning. He is lowering his formerly bullish rating on the tracking stock to equal weight and cutting his price target to $56.
The discount -- to a certain extent -- is part of the reason for his now-neutral stance on Liberty SiriusXM. Like a closed-end fund that perpetually trades at a steep discount, getting in on the cheap doesn't mean that you get out at net asset value. Swinburne notes that the stock has traded at roughly the same discount for the last three to four years, and this makes it less likely that Liberty Media and Sirius XM Radio will be able to chart a course that would collapse the existing structure. The analyst assumes that the discount isn't going to go away anytime soon.
Another reason for the Liberty SiriusXM downgrade is Swinburne's near-term concern about Sirius XM Radio itself. The satellite radio behemoth posted encouraging third-quarter results two weeks ago. It beat Wall Street expectations on both ends of its income statement, boosted its guidance, and even hiked its dividend by 50%. Swinburne is concerned about how the next few quarters will play out. He sees the auto industry's supply chain issues eating into car sales, and therefore constricting the pipeline of new subscribers to Sirius XM's platform.
Sirius XM Radio continues to be one of the market's more popular media stocks, routinely topping the industry in daily trading volume. Liberty SiriusXM does offer a way to buy in at a discount, but with the inability to close the gap -- as well as solve the platform's near-term challenges -- at least one Wall Street pro thinks it's time to head for the sidelines.
