SIRI Stock: Buy Sirius XM Holdings Inc. on the Dip

Advertisement

Technology continues to change year after year, and in the process, it reinvents just about every services industry in major markets. Yet, Sirius XM Holdings Inc. (SIRI) has unprecedented connections to the auto industry and a best-in-class lineup of content, allowing the company to consistently produce high-single-digit growth and defy the odds.

sirius xm radioAnd 2016 shouldn’t be any different for SIRI stock, which is expected to grow revenues 8% this year and 7% in 2017. However, that strong growth is just one reason SIRI will return to past highs, and not the most significant reason.

Since the recession, the auto industry has been one of the economy’s strongest, but auto stocks have not reflected this strength. The fact is that U.S. auto sales might be strong, but Europe sales have weighed on global performance for several years, and most recently, turmoil in China and forex have been problematic.

Nevertheless, SIRI stock has been the single greatest investment from the strength in auto, with its services available in most new cars, and its services being one of the few a la carte services associated with new car sales. But that still doesn’t explain why SIRI stock will bounce back after falling 18% from last year’s high.

The Real Reason You Should Buy SIRI Stock

The reason SIRI stock will surge to new highs is because Sirius XM has one of the most shareholder friendly buyback programs in the world. Sirius XM has spent more than $6 billion in buybacks over the last three years, and according to management, investors can expect $2 billion in buybacks annually moving forward.

While shares of SIRI stock are beaten right now, the effects of its buyback program are unquestionably obvious. Since the start of 2014, Sirius XM has reduced its share count by 16.4%. SIRI stock is flat in that time, but its market capitalization has fallen by 16.5%.

For the moment, let’s ignore the fact that buybacks actively change EPS metrics and might attract buyers. All else being equal, had Sirius XM not bought back one share, its stock losses would be equivalent to its market capitalization loss. Instead, Sirius reduces the share count, and the stock price must go higher to support the same valuation. Thus, the buybacks are having a big effect, and will continue as Sirius XM continues to reduce its share count substantially each year.

When you add these lavish buybacks with a very strong business you achieve long-term stock success. This is a company that’s coming off a record performance.

In the fourth quarter, Sirius XM achieved record revenue of $1.2 billion after growing 10%, which was fueled by record subscriber growth of 2.28 million for the full year. What’s really amazing is that Sirius XM had expected just 1.2 million new subscribers for 2015 back when the year first started. The fact that it performed so much better, nearly double what it foresaw, illustrates the strength of both this industry and the company.

Furthermore, Sirius XM’s free cash flow rose 14% last year to $1.32 billion. Therefore, SIRI stock now trades at a multi-year low of just 13.3 times FCF, a degree of value that won’t last long given how well the company is performing and how quickly the company is to buy back stock when it is trading lower.

In other words, buy SIRI stock.

As of this writing, Brian Nichols was long SIRI.

More From InvestorPlace


Article printed from InvestorPlace Media, https://investorplace.com/2016/02/siri-stock-buy-on-the-dip/.

©2024 InvestorPlace Media, LLC