Sirius XM Holdings Inc. (SIRI) has been a mostly dead money investment for the last year, but past performance isn’t necessarily indicative of future gains.
Specifically, SIRI stock is flat over the last 12 months; yet, with equity markets lower, one could conclude that SIRI has been a good investment.
Fortunately, the next 12 months and beyond should be even better for stock in Sirius, and that’s why SIRI should become a core holding in your portfolio.
Despite new innovations in music delivery and content from the likes of Pandora Media Inc (P), Apple Inc. (AAPL), Alphabet Inc (GOOG, GOOGL), Amazon.com, Inc. (AMZN), iHeartRadio, etc., all migrating to the car thanks to internet capabilities and in-car operating systems, SIRI continues to have an unmatched presence in the car.
While it would seem that SIRI would suffer due to all of these new listening options in the car, the company just surpassed 30 million subscribers for the first time during its last quarter, adding 465,000 net new subscribers.
Fact is, there are a lot of internet radio listening options out there, but only one Sirius XM, boasting a vast library of unique content like Howard Stern, an NBA partnership and, of course, music itself.
Why SIRI Is Essential
Not only does Sirius XM have a sustainable subscription-based business model, but it also has very high operating margins of nearly 29% the past 12 months. Seeing as how SIRI already has the largest and most diverse collection of radio assets in the world, and new subscription revenue is mostly converted to profits, Sirius XM accumulates cash very quickly. The fact that SIRI’s free cash flow grew 19% versus revenue growth of just 11% in its most recent quarter is a good reflection of this fact.
What Sirius XM does with that cash is return it to shareholders in the form of stock buybacks. During each of the last three years, Sirius XM spent an average of $2 billion to buyback shares. After spending $588 million during the first quarter, SIRI is on pace to exceed that $2 billion mark. This aggressive buyback program creates increased buying pressure in SIRI stock, and because Sirius XM is so persistent in its purchasing, such activity, coupled with its relatively safe business model, is what makes Sirius such a great core investment.
What About Performance?
Ultimately, for an investment to be good it must return gains, and over the past year SIRI stock has traded flat. As already explained, the market has been down, so the fact that SIRI is flat is actually a good thing. Furthermore, SIRI stock is presenting its best face in years.
In the past year, Sirius XM’s market capitalization has declined by 9% despite its business continuing to grow larger. The fact that the company has bought back shares so aggressively is why the stock has traded flat versus the losses in its market capitalization, the effect of reducing share count by 7.6%.
That said, as Sirius XM continues to up buybacks, and its market cap declines as a result, reductions to its share count become larger as an overall percentage, increasing the buying pressure on Sirius stock. This suggests that the likelihood of gains in SIRI stock continues to rise year-after-year, thanks to buybacks.
And finally, SIRI is now trading at just 20 times forward earnings — the cheapest it’s traded in more than five years. Given that SIRI is expected to grow revenue 8.5% this year, 7% next year and free cash flow even at an even faster rate, there has not been a better time to invest in Sirius XM.
As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.
