Why Did Warren Buffett Buy Sirius XM?

When Warren Buffett first bought shares of Sirius XM stock, a few investors took notice but the news didn’t make a big splash.

That has all changed now because Warren Buffett’s Berkshire Hathaway has increased its stake in Sirius XM stock from 9.7 million shares in the prior quarter to 40.24 million in the most recent quarter.

Why did Buffett 4x his stake in this satellite radio operator?

Why Did Warren Buffett Buy Sirius XM Stock?

Warren Buffett bought Sirius XM because it is the sole licensed satellite radio operator and is 17.1% undervalued according to 11 analysts.

Given its status as the only licensed operator, Sirius XM has a wide moat that no doubt Buffett sees as providing a sustainable competitive advantage.

In a sense, Sirius XM has a monopoly in its field and that’s the kind of business structure Buffett is attracted to because it usually means a business can command larger margins and generate higher earnings.

Does the investment thesis stand up to scrutiny?

Sirius XM Profits Are Consistently High

For a company that generates about $2.2 billion in top line revenues quarterly, Sirius XM is very profitable.

Over the last 10 quarters, it’s been rare for Sirius XM to post a quarter where earnings before interest and taxes didn’t eclipse half a billion dollars.

Indeed it was 12 quarters ago, back in Q4 2020 when operating income was last negative. So too did diluted earnings per share come in negative that quarter to the tune of $0.16 per share. Since then, a steady string of positive EPS quarters have followed with the most recently reported one being $0.091 per share.

On the topic of profits, a factor that likely attracted the investment team at Berkshire Hathaway is the price-to-earnings multiple of 14.4x, a figure that sneaks in under the 15x that Buffett is believed to favor when considering stocks to buy.

The multiples overall seem fairly attractive. For example, the price-to-sales multiple sits at 2.0x, which stems from the market capitalization of $18.4 billion on sales of close to $9 billion.

Is Sirius XM Stock Undervalued?

While analysts have fair value pegged at $5.15 per share, a discounted cash flow forecast analysis suggests the stock is even more sharply undervalued with intrinsic value sitting at $5.52 per share.

That’s based on a 5-year DCF though a 10-year DCF ends up even more bullish with fair value of $6.39 per share.

No matter how you analyze the stock now, it does appear to be trading at a discount to fair value, and when combined with a wide moat, makes it clear why the Oracle of Omaha found the stock enticing.

With that said, it should be noted that 40 million shares at a $5 price point is a mere $200 million investment for Buffett. In other words, it’s a proverbial drop in the bucket relative to the hundreds of billions that Berkshire oversees.

It suggests that while Berkshire is willing to make a good sized investment, the conviction to load up by acquiring billions of dollars worth of Sirius XM stock is not quite there.

Sirius XM Is Going to Pay Buffett Handsomely

Another attractive quality of the stock as far as the Sage of Omaha is concerned is its 2.22% dividend yield that will pay out $0.1064 per share annually.

Or in other words on the 40 million shares owned, a ballpark $4 million payout in the form of an annual dividend, paid quarterly, will be received by Berkshire Hathaway shareholders.

The payout ratio of just 30% suggests that the dividend will be paid for the foreseeable future with no anticipated interruptions.

Is Buffett Missing The Monumental Debt?

If there were one gaping hole in the bullish investment thesis, it would be the gigantic debt with which Sirius XM is saddled.

With $216 million of cash and $8.6 billion in long-term debt, Sirius XM is perched precariously on the balance sheet.

It’s such an enormous amount of debt relative to its cash levels that it’s arguably quite concerning and surprising that Buffett would entertain it. That level of debt is large enough that Peter Lynch, if he were analyzing it, might have a thing or two to say about the dangers of owning such a heavily indebted firm.

On the other hand, a company weighed down by debt that rivals its annual revenues is arguably in a financially responsible and stable enough position to withstand the winds of fortune changing against it in the form of higher interest rates.

Much worse would be a company that has lower revenues and a similar level of debt attempting to ride out a poor economy.

Is Sirius XM Stock a Buy?

Sirius XM stock has a lot going for it, including around $8.9 billion in revenues and a streak of profitability that has been uninterrupted for 10 quarters straight.

The multiples, whether PE or PS ratios, are relatively low for such a prominent company with a sole grasp on the satellite radio market.

It’s clear that the valuation is quite attractive now too. Both a cash flows analysis and analysts suggest material upside potential lies on the horizon for shareholders, who also get the perk of a regular dividend while waiting for fair value to strike.

The one big drawback to Sirius XM at this time is the large debt sitting on the balance sheet. It’s so large that it rivals the annual revenue figures.

For Buffett, it seems that isn’t enough of a concern to stop a purchase of shares. But perhaps it’s sufficiently concerning to give him pause about buying a whole lot relative to Berkshire’s overall size. While Buffett did snap up about $200 million worth of shares, that’s just a drop in the bucket relative to Berkshire near trillion dollar market cap.

So it seems Buffett and his team have conviction but not an abundance of it.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.