Warren Buffett's track record shows the merit of making long-term bets on high-conviction stocks. He's the epitome of patient investing, and there's one stock his company's been buying lately that seems to be testing every investor's patience.
Sirius XM Holdings (SIRI +1.20%) has been a market laggard. Shares of the satellite radio provider are down 16% over the past year, and off a portfolio-blistering 59% over the last five years. Despite Sirius seeming to be the equivalent of audio quicksand, Buffett's Berkshire Hathaway (BRK.A 1.08%) (BRK.B 1.09%) added to its existing stake three times over the last eight months.
Berkshire Hathaway now owns more than a third of Sirius XM's outstanding shares. It's a big bet with nearly 120 million shares and a stake valued at $2.7 billion. With Buffett set to retire by the end of the year, this radio niche monopoly might even be his final big bet. Is this generation's greatest investor going out with a dud? I don't think so. Let's go over some of the reasons why this cheap and admittedly out-of-favor stock could be a big winner for your portfolio.
NASDAQ: SIRI
Key Data Points
Chasing satellites
There's no ignoring the elephant in the room. Satellite radio is experiencing a dip in popularity. This is shaping up to be the third consecutive year of declining revenue for Sirius. While it's still highly profitable, this is the fourth straight year of decelerating operating income.
Sirius XM was great two decades ago for driving commuters and the automobile industry, but now the game is changing again. Younger listeners behind the wheel are turning to podcasts and cheaper music streaming apps to provide the soundtrack to their drives. Satellite radio seems to be on a gradual but definite fade out. It doesn't have to be that way.
Before shifting gears to cover the potential turnaround here, check out the value. The media stock is cheap no matter where your channel surfing lands. Sirius XM is trading for just 7.7 times this year's projected profitability, and analysts see earnings per share starting to inch higher again next year. Its latest guidance suggests that this should be Sirius XM's 11th consecutive year of generating more than $1 billion in free cash flow. The cherry on top there is that the satellite radio giant is forecasting $1.5 billion in free cash flow in 2027. It's only been that high once in the last nine years.
Its popularity is waning right now, but trailing revenue is just 4% below where it was when the top line peaked more than two years ago. Sirius XM also isn't afraid to eat its own cooking, reducing its share count by 48% since its 2013 peak. It's not the only way that the platform operator is returning money to shareholders. The stock's current 4.8% yield makes it one of the biggest payouts in Berkshire Hathaway's public stock portfolio. Sirius XM boosted its quarterly dividend every year since initiating a distribution policy eight years ago.
Image source: Getty Images.
Betting on Buffett
Stocks are typically cheap for a reason. Now let's end on what Sirius XM can do to turn that around. Sirius XM still reaches a massive audience of 33 million accounts. Its current monthly churn rate of 1.6% is within the format's historical range. It's not the pace of cancellations that's gnawing away at Sirius XM's potential, it's the lack of new sign-ups.
There are a few potential catalysts that can turn things around. Companies calling folks back in to in-office work should result in more commuters seeking seamless entertainment on congested morning and afternoon drives. U.S. gas prices in May were 12% lower than they were a year ago, so there's not an inflationary pressure point keeping folks from driving for pleasure, either. New car sales are the funnel that feeds into Sirius XM's ecosystem, and that's a problem. The average age of a U.S. passenger car is at a record 14 years. If the economy improves and financing rates come down, there's a lot of pent-up demand for new vehicle sales that should kick in.
Sirius XM is also making its own luck. Howard Stern put Sirius on the map almost 20 years ago, and he is keeping the platform's core audience in place. Sirius XM is now investing in a deeper bench of trendy personalities to woo younger audiences. Ripping a page out of the Spotify playbook, Sirius XM struck deals with popular podcasters to boost listenership and engagement. It's already starting to pay off for its audience of roughly 70 million listeners across those 33 million accounts. A bright spot in its latest financial update is that podcast ad revenue surged 33% in its latest quarter.
The future isn't as dreary as the bears might think here. Berkshire Hathaway's throwing more money at Sirius XM in Buffett's final year at the helm, and history should show that the generational investor went out with a bang.
