One of the more interesting investment opportunities in recent years has been Sirius XM Holdings (NASDAQ:SIRI). In light of higher sales and rising profits, shares of the satellite radio provider have soared 2,750% since the end of 2008 from $0.12 to $3.42.
Since the end of 2012, however, slowing sales growth and a high P/E multiple have resulted in the company's stock climbing just 18% while the NASDAQ Composite, Sirius' benchmark index, has skyrocketed 47%. In an effort to appease shareholders, including Sirius' largest shareholder Liberty Media (NASDAQ:FWONA), management has begun buying back stock at record numbers. $4 billion later though, it seems that the buyback party is just beginning.
Sirius has been doling out some serious cash!
In Dec. 2012, Sirius announced a $2 billion share repurchase plan aimed at buying stock from investors who want out of the game and consolidating ownership in the hands of those who believe the company still has room to run. After a failed buyout attempt of the company by Liberty Media in Oct. 2013, management announced a further buyback plan amounting to $2 billion.
|Date||Amount Authorized||Total Balance Remaining|
|Dec. 2012||$2 billion||$109 million (March 2014)|
|Oct. 2013||$2 billion||$2.109 billion (March 2014)|
|Jul. 2014||$2 billion||$4.109 billion (Jul. 2014 est)|
As part of its second authorization, Sirius agreed to buy back not just the shares of individual investors, but also at least $500 million worth of stock from Liberty Media. Of this amount, $160 million was acquired by the end of 2013, with the remaining $340 million being acquired on April 25, 2014. Even after the completion of this transaction, however, Liberty Media still owns in excess of 50% of Sirius' outstanding shares.
Now, in spite of having $2.1 billion still available under its previous authorizations, Sirius believes it's time to keep the ball rolling with its just-announced buyback. According to the company, it can complete these buybacks through the open market, private transactions like it did with Liberty Media, and accelerated stock repurchases where management can acquire large amounts of stock at a time.
Where is Sirius getting all this cash from and is there a better alternative?
Even though business growth is slowing, as evidenced by the modest 6% increase in subscriber count from 24.4 million in the first quarter of 2013 to the 25.8 million reported this year, Sirius' free cash flow has been on a tear. Between 2009 and 2013, the company's free cash flow soared 401% from $185.3 million to $929.2 million. In part, this has been due to net income growth, which has increased from a loss of $352 million in 2009 to a gain of $377.2 million last year, but other factors have included depreciation and amortization, and increases in the business's deferred taxes.
While it's nice to be able to consolidate ownership, there are better things to do with significant amounts of cash on hand than buy back shares. One option is for the company to invest in growth initiatives, whether it be organically driven, or acquisition-based. Unfortunately though, growth isn't always an option, especially as Sirius' market is showing signs of maturity. Another possibility is for management to pay off debt, something Sirius has plenty of.
As of the end of its 2013 fiscal year, Sirius had $3.1 billion in long-term debt. On this debt, management paid $204.7 million in interest for the year, which equates to a weighted average interest rate of 6.6%. Fortunately, the company has made a habit of refinancing older, higher-cost debt with new, lower-cost debt, but during its most recent quarter, the $54.1 million paid on $2.9 billion in debt indicates that there company's borrowing costs still remain high. Instead of buying back shares at a time when earnings are still low in relation to sales, management might be better off paying down its costly load of debt, thereby increasing profits in the long run.
There's no denying that Sirius has been a strong growth story in recent years and, in light of lackluster growth opportunities, management has elected to do something it sees as productive with its cash. In the long run, soaring profits would likely be met with skyrocketing share prices, but at a time when earnings are still low and the company is still trading at 57 times 2013's net income, management might be better off to use its excess cash to reduce debt outstanding. On top of increasing profits and free cash flow in the long run, this approach will reduce the risk of adverse conditions down the road should Sirius' business be hit by a downturn.