Among the dozens of stocks in Berkshire Hathaway's (NYSE: BRK.A) (NYSE: BRK.B) portfolio, there are a few surprising holdings. One name that stands out as an odd choice for Warren Buffett is Sirius XM Holdings (SIRI). The satellite radio operator was once a battleground stock. Now, it just battles the ground, seemingly forgotten by growth and value investors alike as its price meanders around in mid-single-digit territory.
Berkshire owns a small stake in Sirius XM itself, and a larger position in Liberty Sirius XM (LSXMA -0.90%) (LSXMK -0.53%), the tracking shares that have historically traded at a discount to the satellite radio monopoly's shares. They are slated to merge into Sirius XM by the third quarter of this year.
After years of decelerating revenue growth and a fairly flat stock chart, one might wonder why anyone would think this could be the year that Sirius XM goes parabolic. Let's go for a drive. I hope you don't mind if I crank up the volume.
Around the dial
There wasn't a lot to like about the fourth-quarter results the company delivered last week. After years of slow but steady subscriber growth, Sirius XM's rolls declined by 445,000 listeners. Revenue fell for the first time in the platform's 21-year history. Management's latest guidance calls for a 2% top-line decline in 2024.
As such, this would seem to be a lousy time to dive into Sirius XM, but low expectations are already baked into the stock price. The shares have fallen for four consecutive years, and they're trading lower so far in 2024. The stock is down by 30% since the end of 2019. However, Sirius XM is far more profitable now than it was then. It has also boosted its dividend every year.
The result of all this is that its trailing earnings multiple (less than 16) has never been lower, and its dividend yield (2.1%) has never been higher.
That's not all: Sirius XM is a money machine. It generated $1.2 billion in free cash flow last year, and the dividend wasn't the only way that Sirius XM returned money to shareholders. It has also been aggressively buying back its stock. Sirius XM has gone from a peak of 6.8 billion shares outstanding in the summer of 2011 to 3.9 billion shares outstanding today. There aren't many companies that have shaved more than 40% off their share counts over the past dozen years, and it means that today's profits go considerably farther on a per-share basis.
Image source: Getty Images.
Stepping on the gas
It's not all good news. Sirius XM's debt load is a lot higher than it was when its share count was peaking in 2011, and leverage isn't a good look in this period of higher borrowing costs. However, let's talk about the business itself.
The popularity of Sirius XM's service has taken a hit since the pandemic, for obvious reasons. Satellite radio is consumed largely in the car, and people aren't driving as much as they used to. It's surprising that revenue even rose at Sirius XM in 2020, but even now, we're still spending less time on the open road. This should change.
More companies are recalling employees to full-time in-office work. Gas prices are down by more than 30% from their 2022 peak. Travel for business and pleasure is also expected to rise this year, giving us more time in our cars or rented ones where Sirius XM is available for a fee.
The advertising market should also rebound as economic growth picks up in 2024. With Sirius XM's 33.9 million satellite radio subscribers, subscription revenue is more important than ad revenue for it, but marketing is a bigger part of the growth story for the company's Pandora unit, with its more than 46 million streaming users.
Sirius XM is a cheap and misunderstood media stock. The platform survived the advent of connected cars, which have now been ubiquitous for a decade. At a time when many of the traditional media players are paring back on content or losing billions on streaming, Sirius XM continues to build up its moat of proprietary audio content, and its near-term profitability is practically assured. It's a depressed value in a market that's hitting all-time highs.
In any given year, some of the biggest winners often turn out to be the companies or industries you would least expect to lead the way. In 2024, Sirius XM could be one of them.
