SiriusXM ($SIRI)
following Berkshire's lead
SiriusXM ($SIRI)
Stock price: $25.00
Market Cap (MM): $8,461
Enterprise Value (MM): $17,751
Shares Outstanding: (MM) 339
SiriusXM’s ($SIRI) stock has been chopped in half since the beginning of the year. After a decade of consistent subscriber growth, investors panicked after the company reported losing approximately 400,000 self-pay subscribers (about 1% of total subs).
The price capitulation reminded me of John Huber’s (Saber Capital) recent post about how the market’s narrative can sometimes be either directionally correct, but taken to the extreme, or point-blank wrong.
This strikes me as a case of the former, with the investment community being right that streaming services like Apple Music and Spotify are viable substitutes for satellite radio and would take revenues from SiriusXM. However, the pendulum has swung too far, and now presents an opportunity for investors to buy a highly cash-generative legacy business at an attractive mid-teens free cash flow yield.
Further, this stock is worth examining (or even buying) because Berkshire Hathaway owns 31% of the company. It’s likely Ted Weschler is behind the acquiring of shares because of his individual and children’s stake in the business, as well as his past affiliation with Liberty Media. Weschler ran Peninsula Capital Advisors from 2000-2011, posting 22.6% annualized returns compared to the S&P 500’s 0.5%. In his departing letter to Peninsula partners, he briefly wrote about the holdings in the fund, and reasons they should perform well in the future, one being Liberty Media Corporation, which held a 40% stake in SiriusXM.
Another company he mentioned was DirecTV, and he outlined their capital allocation policy: “Given the excess cash flow the company generates (in 2012, it is expected to throw off more than $3.0 billion of cash over its capital needs), it has been an aggressive purchaser of its own stock, having reduced its share count from 1.39 billion shares at year-end 2005 to less than 700 million today. The company trades at a 10.3x multiple of 2012 free cash flow, implying a 9.7% yield, while it borrows in the public marketplace at less than a 3% after-tax cost. The company’s capital management strategy is very straightforward: it will just barely maintain an investment grade rating on its debt, levering its EBITDA 2.5-to-1 and utilizing excess cash from operations and incremental debt capacity from its growing EBITDA to continue to repurchase stock at a rate of $100 million a week for the next several years. If the company meets Wall Street’s growth expectations (which I consider highly likely given the Latin America exposure) and continues its capital management program, it will either run out of shares in the next five years (admittedly an impossibility) or its stock price will begin to reflect the cash-generating potential of the business.”
SiriusXM will most likely copy this playbook; their debt isn’t quite investment grade (BB) but is low-cost and well-laddered. Their target net debt to EBITDA is low 3’s; they’ll be an aggressive purchaser of their stock, and the market will soon appreciate the cash generation of the company.
Business Overview:
SiriusXM dominates the audio entertainment market in North America, offering both its satellite subscription service and Pandora’s streaming platform. Together, these services reach around 150 million listeners every month.
SiriusXM delivers a wide range of content, from music and sports to comedy, talk shows, news, traffic, weather, and podcasts. This programming is available live, curated, and on-demand via their satellite radios and streaming app. Subscriptions range from $10 for app access to $25 for the premium in-car package, which includes exclusive content like Howard Stern and live events. With about 33 million subscribers, their average monthly revenue per user is roughly $15.
Though often compared to Spotify and Apple Music, SiriusXM stands out for its sheer variety, particularly in sports content. It remains the most affordable way to access diverse sports programming, with strong customer satisfaction and engagement that outpaces its competitors.
(pictures: tdylan409 - VIC)
(source: 10-k)
The smaller segment of their business is Pandora, which they bought in 2019. Pandora operates as a streaming service that delivers music, comedy, and podcasts, all tailored to the user. It’s available across mobile, car speakers, and other connected devices, letting listeners build custom stations and playlists, explore new content, and tap into curated collections. Pandora comes in three tiers: a free, ad-supported version, a paid radio subscription (Pandora Plus), and an on-demand subscription (Pandora Premium), giving users flexibility based on their preferences and budget.
The bulk of this business is SiriusXM and it’s loyal subscriber base. Despite recent headwinds, the company has an industry-leading subscription churn rate of 1.5% due to its popular programs such as NFL Radio, CNN, MSNBC, and Fox News.
The main argument surrounding SiriusXM is its inability to capture the younger generations, and the company will end up being a melting ice cube, a perennial value trap. However, they have invested in new content and better technology, particularly “360L”, a personalized advanced in-car technology, which will help revamp subscriptions. Also, I think as younger generations age, Sirius XM will gain some of them as subscribers; it works both ways.
Valuation:
SiriusXM could see decent growth from its investments in 360L, a streaming app, and new satellite launches, which would cause the stock to lift as pessimism has been rampant. Also, subscription prices will continue to increase and over time churn should be minimal. Management has guided to ~$1.8 billion in free cash flow in 2028, projecting 50% growth from today’s base of $1.2 billion. Sirius XM’s ability to generate cash substantially above its operating needs will result in a combination of dividends, stock repurchases, and debt repayments. Buybacks are especially lucrative now given the stock trades at a roughly 14% free cash flow yield. The company should produce around ~$5.5 of FCF until 2028: $1.5B dividends, $2.5B buybacks, and $1.5 debt repayments; the investment is attractive solely on the premise modest growth and capital returns, and if multiple expansion occurs investors receive a “triple dip” (earnings growth + capital returns + multiple re-rate).
Ancillary:
In an interview about a decade ago, Ted Weschler mentioned he likes to be the largest shareholder of companies he invests in, despite not speaking with management. Moreover, it is a byproduct of his concentrated philosophy, a 10% position managing $15 billion is $1.5 billion.
Berkshire Hathaway is the largest shareholder of the following companies:
Bank of America ($BAC)
American Express ($AXP)
Coca-Cola ($KO)
Occidental Petroleum ($OXY)
Kraft Heinz ($KHC)
Moody’s ($MCO)
Davita ($DVA) – was in Weschler’s prior fund
VeriSign ($VRSN)
SiriusXM ($SIRI)
Ally Financial ($ALLY)
Also, we know Berkshire recently bought more $SIRI
“$BRK.B filed a Form 13G reporting a 31.01% ownership of $SIRI.
The table below shows the math that this is ~1.1% higher than expected based on previous disclosures.
$BRK.A likely purchased additional $SIRI shares before the merger closing on 9 September.
Because Berkshire owned <5% of total (old) SIRI shares, it was not required to report its activity.
If it had bought more LSXMK or LSXMA shares, it would have had to report its activity within 3 days, and the same rule likely applies to (new) SIRI today.
Only folks expecting to see 29.9% ownership of $SIRI would have been surprised to see 31.01% and done some math to find the discrepancy.” – (@andrewcoye on X)