Liberty Media Says, “Give Me Sirius!”

by Lawrence Meyers | August 16, 2012 10:45 am

The legendary John Malone has increased his Liberty Media’s (NASDAQ:LMCA[1]) stake in Sirius XM Radio (NASDAQ:SIRI[2]) from 46% to 48%. If you haven’t figured it out already, Mr. Malone wants to own the whole darn thing.

Sirius looked dead four years ago, with huge losses and no apparent way of turning things around. But over time, the service has been embraced by consumers, demand remains strong and its 2.0 product is likely to boost retention.

The company boosted prices without a revolt (hear that, Netflix (NASDAQ:NFLX[3])?) and will likely do so again in the future. Its operating margins have been on a steady increase, leaping from 21% in FY 2009 to 36% in FY 2010 and 46% in the FY 2011.

As for profit, the company finally turned the corner in 2010 with a $43 million profit, and increased it tenfold 2011, which has helped drive free cash flow. That number was a negative $283 million in 2008, and has steadily increased to $510 million for the TTM — with reduced capital expenditures coming, which will boost that metric even higher.

There are also some very attractive secular trends[4] that play into Sirius’ hands. Automobile sales have been on fire[5] and are expected to grow even more. The more cars sold, the more XM radio service gets sold. In addition, SiriusXM is now available on all kinds of mobile devices[6].

Is anyone still wondering why Mr. Malone is so in love with Sirius?

And that’s another reason to consider getting involved in these stocks — you are also buying into John Malone and Greg Maffei. These guys are the greatest investors! I frankly think Mr. Malone is better than Warren Buffet.

Liberty’s way of doing business has been consistent — it buys large stakes (or all) of great businesses and like Warren Buffett, it does not interfere. It buys assets because they are undervalued. All you need do is look at how the DIRECTV (NYSE:DTV[7]) deal played out. Liberty had a lot of power in that deal, but in the end chose to stay out of the way and just make money.

So what’s the play?

One choice is to buy Sirius stock outright. The improving metrics are phenomenal and, frankly, I am mystified as to why the stock remains in a tight trading range. This is a classic free cash flow play, just like Liberty’s other deals and holdings.

The problem, in my eyes, is that the market has never rewarded Liberty’s assets with the valuation they deserve. Despite that, it seems to me that there’s very little downside to buying the stock here.

You might also go with options. The January 2014 calls are only going for 44 cents. That’s a very cheap way to see if the stock will have a run over the next 18 months.

Or you could just buy Liberty. It has stuffed a bunch of its holdings[8] into its latest securities incarnation, and those companies offer a lot of diversification to hedge your interest in Sirius, which accounts for roughly 82% of Liberty Media’s current market cap.

As I said, the market undervalues Liberty’s assets, making it a value play. Eventually I believe the market will catch up. By purchasing Liberty Media stock, you are not only getting in on Sirius, but you are getting access to the whole slate of companies that Liberty believes are undervalued.

As of writing this, Lawrence Meyers did not own a position in any of the aforementioned securities.

  1. LMCA:
  2. SIRI:
  3. NFLX:
  4. very attractive secular trends:
  5. Automobile sales have been on fire:
  6. on all kinds of mobile devices:
  7. DTV:
  8. bunch of its holdings:

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