There is a lot of variety when zapping through the offer on SiriusXM Holdings‘ (NASDAQ:SIRI) Satellite radio platform. The same goes for opinions on the stock itself. Sirius XM has evolved from a speculative and volatile penny stock 15 years ago to a stable and profitable media giant.
But that doesn’t mean investors have been rewarded by the transformation. Despite the platform’s success – it currently serves 33 million subscribers – the stock has lost half its value over the past five years. It’s one of the biggest losers this year, but will it stay that way? Let’s take a look at the reasons to buy, sell or hold Sirius XM.
Buy Sirius XM
It’s hard to live in the shadow of the embattled stock of long ago, but things are much better today than they were when reluctant regulators approved the Sirius-XM merger and nearly bankrupted the upstart. Sirius XM is a company that has consistently generated tens of figures in annual free cash flow over the past few years.
The best argument for Sirius XM right now is its value. In a world where traditional media companies are struggling to survive, spending money on digital initiatives they don’t have, or are indebted to the point of unprofitability in a sluggish advertising market, Sirius XM is cheap. It trades for less than 10 times trailing earnings. The earnings multiple is still a reasonable 16 when you factor in Sirius XM’s inflated enterprise value.
There are growth challenges, but Sirius XM is taking extraordinary measures to return money to shareholders. The company is aggressively buying back shares and has reduced its share count by nearly 40% since its peak 12 years ago. It is also returning money to shareholders by paying a dividend that has increased every year since it adopted a dividend policy in 2016. The low share price this year gives Sirius XM a yield of 3.4%.
And finally, there is the Warren Buffett aspect. Berkshire-Hathaway owned 36.7 million shares of Sirius XM at the start of the year. In the second quarter, that stake nearly quadrupled to 132.9 million shares. Buffett believes in a stock that’s down 42% this year? I think I’ve been hiding the main point.
Sell Sirius XM
A stock wouldn’t be as cheap as Sirius XM if it didn’t have problems, and there are some good reasons to stay away from the satellite radio monopoly. Let’s start with growth, or what is now a lack of growth. Organic revenue increases have been in the single digits since 2015, and last year those single digit revenue increases turned negative.
Satellite radio has a problem. Younger drivers are gravitating toward streaming apps in their connected cars, slowing the number of new subscribers. While churn is under control as long-term subscribers stick around, the historically low churn rate is no comparison to the thinning pipeline of new trial subscriptions. Sirius XM has 618,000 fewer subscribers than it had at the start of this year.
There is another reason to be concerned about Sirius XM, aside from the slow extinction of the business. Media mogul John Malone owns a majority stake in Sirius XM. The company is currently being sold as Liberty Sirius XM Group Tracking shares. Last week, Malone’s shareholders approved a plan to combine its discounted tracking shares with Sirius XM’s more heavily traded common stock. The transaction is set to take effect after the close of trading on Sept. 9.
What’s so bad about the deal? Well, some investors who own Liberty Sirius XM Group to get in on the cheap could be getting out starting September 10. While the sell-off could be short-lived, it’s another potential problem for bulls of the disgraced media stock.
Hold Sirius XM
The positives are offset by some negatives. The buybacks are improving profitability per share, but Sirius XM has paid much more for many of these stocks over the years than they are now earning. The end of Malone’s tracking stocks in two weeks may lead to a wave of selling, but it could also be a wake-up call for bulls that the distraction of Liberty Sirius XM Group is no longer weighing down the satellite radio market’s attention.
The stock is cheap, but it’s hard to find a catalyst that can reverse slowing sales growth. Buffett is here, but he also owns a sizable chunk of tracking stocks. What if he joins the potential wave of sellers next month? There are question marks for a company that was once all about exclamation points.
I’m on the bull side here. The stock is cheap enough for a potential takeover. If it doesn’t get bought out, an activist investor might have better plans for this cash cow than just buybacks, dividends, and debt repayment. A turnaround might take some time, but with a healthy yield, investors will at least be paid for the wait.
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Rick Munarriz does not own any stocks mentioned. The Motley Fool owns and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
Sirius XM: Buy, Sell or Hold? was originally published by The Motley Fool