My analysis of Sirius XM

Satellite-radio company Sirius XM (SIRI) is the latest stock to hit my radar...

In yesterday's e-mail, I noted that Berkshire Hathaway (BRK-B) investment manager Ted Weschler has been scooping up the beaten-down shares of Sirius, and now owns 32% of the company.

I've been following Weschler since long before he joined Berkshire and have had the pleasure of meeting him a few times (most recently at the latest Berkshire annual meeting in Omaha, Nebraska after we both ran the 5K race).

He's a super nice guy and a brilliant investor, so seeing him make such a big bet on Sirius caught my eye.

As such, let's take a first look at Sirius today and see if it makes sense to follow Weschler's lead with a bet on the stock...

The company consists of two main audio-entertainment businesses:

• SiriusXM, which has 33 million subscribers paying an average of $15 per month for more than 400 channels of music, talk, and sports.
• Music-streaming service Pandora, which has about 45 million monthly active users and around 6 million paying subscribers.

The stock has been on a wild ride over the past two decades. SIRI shares went from more than $90 to less than $1 during the global financial crisis. Liberty Media saved the company from bankruptcy in February 2009 and the stock recovered to more than $75 per share in 2018, but since then it has sunk to yesterday's close of $27.21 per share:

For most companies, the stock price and earnings track each other closely over extended periods... but that's not the case with Sirius.

In marked contrast to the stock, the company's revenues and profits have grown steadily for most of the past two decades... though they have stalled out since 2021:

Sirius generates lots of cash – $15.9 billion since the beginning of 2013 – but hasn't grown operating cash flow in eight years. Meanwhile, capital expenditures ("capex") have risen recently, so free cash flow ("FCF") has dipped over the past year and a half. Take a look:

Since 2013, when Sirius began share repurchases, it has bought back $17.9 billion of stock and paid out $3.3 billion in dividends (it's currently yielding 3.9%) – a whopping $5.3 billion more than it has generated in FCF:

This has reduced the share count by 44% since the peak in 2012:

However, returning so much more cash to shareholders than it has generated has ballooned Sirius' debt load since 2013:

To address this worrisome debt load – current net debt of $9.3 billion equals almost eight years of trailing-12-month FCF of $1.2 billion – Sirius dramatically scaled back share repurchases at the end of 2022, as you can see in this chart:

But unfortunately for the company, without its own buybacks supporting the stock, SIRI shares have lost more than half their value since the end of 2022.

Turning to valuation, Sirius has a market cap of about $9.2 billion, which is almost exactly matched by its $9.3 billion of net debt – giving it an enterprise value ("EV") of about $18.5 billion.

The stock is trading at 2.1 times EV to revenue, 7.1 times EV to earnings before interest, taxes, depreciation, and amortization ("EBITDA"), and 9.4 times this year's earnings estimates.

Those are low multiples for a high-margin subscription business, even one that's not growing, but Sirius has two strikes against it that make me reluctant to pursue this idea...

First, as I noted above, is its ballooning debt load.

The second is that this business appears to be a classic melting ice cube. In the most recent quarter, paid subscribers declined by about 2% in the SiriusXM segment and about 5% in the Pandora segment.

The company believes that it will return to growth (you can see its investor presentation from last month here), as does this anonymous analyst on Value Investors Club earlier this year... but my experience and observation tells me that the subscriber decline is likely to accelerate.

When I bought my car new in 2018, it came with a free year-long trial to SiriusXM. My family and I used it a fair amount in the first year, but not enough to warrant paying what the company was asking, so I called to cancel.

The customer-service rep gave me a huge discount (at least 50%, as I recall) so I continued the service for another year. (If you're a SiriusXM subscriber, if you try what I did with calling and threatening to cancel then you might also get a big discount for staying on.)

We eventually stopped using the service altogether because we now connect our phones to the car and play music, Audible books, or podcasts... so I canceled for good years ago.

If we're at all representative of other customers – and I think we are – then SiriusXM is just another subscription service (and a very expensive one at that), competing head-to-head with Spotify, Apple Music, and other giants, most of whose content is free.

That doesn't bode well for the future of Sirius. So adding it all up today, I would avoid the stock.

Best regards,

Whitney

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