I’ve always believed that if John Malone gets involved in a company, he will make money and by extension, investors probably will also. Malone took a stake in Sirius XM Holdings Inc. (NASDAQ:SIRI) some time ago. Investors can also play Sirius XM by buying Liberty Sirius XM Group (NASDAQ:LSXMA), which owns 65% of SIRI stock.
This was a classic Malone play because Sirius XM is all about the cash flow, and Malone loves cash flow businesses. The typical Malone play is to buy a cash flow business, use the cash flow to lever up and draw down super-cheap debt, and repurchase shares hand over fist for years and years — all while trying to grow the business.
For Malone, however, Sirius XM net income is never as important as just pure cash flow.
He also loves to be involved with dominant players. The Sirius XM numbers are important here, but so is the changing face of music/content delivery over satellite and the internet.
SIRI Stock by the Numbers
Third-quarter earnings were really quite good for Sirius XM. Revenue increased by about 9% or $110 million to $1.277 billion. Sirius XM nine-month revenue increased 10% to $3.71 billion. Operating income increased 12% and 20% for the three- and nine-month periods to $392 million and $1.1 billion, respectively. Sirius XM net income increased 17% in Q3 to $194 million and 46% to $541 million for the nine months. By the time Q4 rolls around, net income will have almost doubled from fiscal year 2013 levels.
Those SIRI numbers alone are pretty amazing. It also came on an almost 10% reduction in shares outstanding. Operating cash flow, which I mentioned is what really matters, increased a whopping 35% to $1.21 billion.
So why has SIRI stock only gone from about $2.14 in 2012 to today’s price of $4.44?
It may be a couple of cosmetic issues. The first is that SIRI stock has just under five billion shares outstanding, so it makes the stock difficult to move. The second is that investors may not grasp that big gains aren’t going to happen because of the share count. Finally, the business simply may not be all that well understood. It happens. Investors never got behind the timeshare sector, despite it being a great business.
So I think SIRI stock may be undervalued here, although there is concern about competition from all the other internet-based services.
One interesting potential play would be for Sirius XM to purchase Pandora Media Inc (NYSE:P). I get the potential for synergy here, but I don’t like the acquisition idea. Pandora has solid revenue growth (about 23%) but product development and marketing expenses are just killing the bottom line. Net loss through the first nine months of 2016 was $253 million, down from the already ugly loss of $150 million the year before.
Operating cash flow went negative to the tune of $179 million, after coming in at $29 million the year before. Free cash flow was negative $225 million. The cash burn is bad news, because cash position was down to $257 million. That suggests about 15 months of cash before things get ugly.
Thus, were Sirius XM serious (so to speak) about an acquisition, I’d have to ask “why?” Unless some big-time expense cuts came along with it, and real cash flow could be wrung from it, it seems like a mistake.
Sirius could just issue more of its own shares, and maybe take Pandora out at a $3 billion valuation. Hey, what’s issuing another 750 million shares (15% dilution) between friends? SIRI would just turn around and use its free cash to buy that all back in about 18 months.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
