Few investors can command the attention of professional and everyday investors quite like Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%) CEO Warren Buffett. In a span of precisely 50 years, Berkshire's annual shareholder meetings have grown from a few dozen shareholders to approximately 40,000 investors.
People trek from far and wide every year to Omaha, NE, to hear the Oracle of Omaha offer his takes on the U.S. economy, corporate America, and potentially catch a hint of what one of Wall Street's most-successful investors has been buying and selling.
Berkshire Hathaway CEO Warren Buffett. Image source: The Motley Fool.
Following the release of Berkshire Hathaway's third-quarter operating results earlier this month, it was painfully evident that Buffett and his investing lieutenants, Todd Combs and Ted Weschler, have been doing far more selling than buying. Berkshire's third-quarter cash flow statement pointed to exactly $1.7 billion worth of equity-security purchases and $6.953 billion in dispositions, which works out to $5.253 billion in net-equity sales. Since Oct. 1, 2022, Berkshire has sold $38.3 billion more in equities than it's purchased.
What wasn't known when Berkshire filed its quarterly report was exactly which stocks the Oracle of Omaha sold and what few companies were purchased. With money managers filing much-anticipated Form 13Fs this past Tuesday, Nov. 14, those questions were answered.
Although Buffett's company completely exited its stakes in seven predominantly brand-name companies, including General Motors, United Parcel Service (UPS), Johnson & Johnson, and Procter & Gamble, to name a few, it was the buy-side of the equation that should have investors doing a double-take.
A familiar value stock has reentered Berkshire Hathaway's portfolio
Buffett and his investment team are big sticklers for value, and it looks like they've found it with their newest addition to Berkshire's portfolio. Say hello, once again, to satellite-radio operator Sirius XM Holdings (SIRI).
During the September-ended quarter, the Oracle of Omaha and his team purchased 9,683,224 shares of Sirius XM, which as of the closing bell on Nov. 14, 2023, were worth approximately $47.35 million.
This isn't Berkshire Hathaway's first rodeo with Sirius XM. Berkshire opened a position in Sirius XM during the fourth quarter (Q4) of 2016 and exited its stake completely by Q4 of 2021. After a two-year hiatus, Buffett, Combs, and Weschler have returned.
If you're looking for a glaring reason why Berkshire initially exited its stake in Sirius XM Holdings during Q4 2021, the interest rate outlook probably tops the list. Even though interest rates were historically low throughout 2021, the rapid rise in M2 money supply during the COVID-19 pandemic offered a pretty clear indication that high inflation and eventual rate hikes were around the corner. Sirius XM carries quite a bit of debt on its balance sheet, which would mean that future deals, major projects, and refinancing activity would be costlier.
To add to the above, Sirius XM is a highly cyclical company. Investors began to see some clues in the second-half of 2021 that a U.S. recession was possible. In particular, a slowdown in ad spending stoked fears for radio operators, which are normally reliant on ad dollars. This may have fanned the flame for Buffett and his team to exit, stage left.
Image source: Getty Images.
Sirius XM is historically inexpensive and ripe for the picking
But the above is ancient history. Sirius XM is the stand-out value buy for Berkshire Hathaway in the September-ended quarter, and there look to be four catalysts powering Buffett's (and his teams') bullishness.
To start with, Sirius XM is a legal monopoly. Though it does contend with competition for listeners from terrestrial and online radio operators, no other company is authorized as a satellite-radio operator. This distinction affords Sirius XM exceptional subscription pricing power and gives the company one heck of an impenetrable moat.
A second reason for Buffett, Combs, and Weschler to be pleased with what they've see from Sirius XM is the company's cost structure. Although certain expenses are going to fluctuate on a quarterly basis (e.g., royalties and talent acquisition), other costs, such as transmission expenses and equipment, are relatively fixed and/or predictable. As Sirius XM adds more subscribers over time, it's not going to see these ancillary expenses rise. That's a recipe for long-term operating margin expansion.
Sirius XM's revenue mix marks what's likely the third core catalyst for Buffett and his investing lieutenants. Whereas most radio operators are overly reliant on highly cyclical advertising revenue, Sirius XM has generated only 19% of its sales through the first nine months of 2023 from ads (via Pandora). By comparison, 77% of Sirius XM's revenue through September has derived from subscriptions.
While businesses are quick to pare back their advertising budgets during the first hint of potential trouble, Sirius XM's subscribers are far less likely to cancel their plan. Long story short, Sirius XM's revenue stream is considerably more inelastic and better-equipped to deal with economic downturns than other radio operators.
SIRI PE Ratio (Forward) data by YCharts.
The fourth catalyst that likely coerced Buffett and his team to act is Sirius XM's historically inexpensive valuation.
When Sirius XM was jettisoned from Berkshire Hathaway's portfolio in Q4 2021, it was trading in the neighborhood of 20 to 22 times forward-year earnings, which was more or less in-line with the broader market. But during the third quarter, Sirius XM was often valued at a multiple of 13 to 15 times forward-year earnings. That's well below its average forward price-to-earnings (P/E) ratio of 22 over the previous five years
The icing on the cake for the Oracle of Omaha is that Sirius XM Holdings also pays a dividend. While the company's 2.2% yield isn't going to drop any jaws, it's an above-average payout, relative to the benchmark S&P 500.
There's a brand-new value stock in town, and its name is Sirius XM.
