Berkshire Hathaway is adding to its position in one of the biggest losers on its scorecard this year. It makes more sense than you think.
Sirius XM Holdings' (SIRI -0.83%) may have fallen out of favor for most investors, but arguably the best stock picker of our time sees things differently. Warren Buffett's Berkshire Hathaway (BRK.A 0.91%) (BRK.B 0.83%) didn't make a lot of portfolio moves in the second quarter, but one of the few tweaks it did make was to dramatically ramp up its stake in the satellite radio provider.
Berkshire Hathaway revealed in an SEC filing after the market close on Wednesday that it owned 132.9 million shares of Sirius XM by the end of June, up from the 36.7 million it held just three months earlier. It's a nearly $400 million position in the media giant.
We don't know Buffett's rationale for ramping up his stake in one of this year's more disappointing performers in Berkshire Hathaway's stock portfolio. This is an icy cold regulatory filing and not a warm Buffett note to shareholders or a chat with investors at the company's iconic annual shareholder meeting. However, it's a big enough move to discuss. I guess I should speculate.
Around the dial
Shares of Sirius XM opened 8% higher on Thursday following the surprisingly robust Buffett move. Even after the pop, the satellite radio monopoly is still trading more than 40% lower in 2024.
Sirius XM did post a larger-than-expected 3% decline in revenue in the second quarter, its second-worst decline in its 30 years of public trading. Only the 5% year-over-year decline during the pandemic-slammed second quarter of 2020 was worse. However, it wasn't the miss that turned the market's warning bell into a dinner bell for Buffett. He was accumulating the shares during the second quarter itself. The spiraling provider of coast-to-coast in-car audio programming announced its latest financials earlier this month.
The move is also surprising given what another notable billionaire is doing. Media mogul John Malone is the largest shareholder of Sirius XM, and folks can grab a piece of his controlling position through ownership of Liberty Sirius XM Group (LSXMA 0.32%) tracking shares. Tracking shares can be confusing and they aren't very popular with investors, but that's likely about to change.
Liberty Sirius XM Group investors will vote at the end of next week to see if they want to combine their shares with the more widely owned Sirius XM common stock. If the vote is successful -- and it likely will be given Malone's backing and the fact that the shares trade at a discount to Sirius XM -- the transaction would be finalized on Sept. 9.
Buffett is always looking for a way to get more bang for his buck. He already owns a large position in Liberty Sirius XM Group. Why did he buy more Sirius XM when he could've just picked up more of the tracking shares instead to get in cheaper ahead of next month's combination? I don't have an answer to that, but I have a theory as to why Sirius XM was one of his few additions this past quarter.
Image source: Getty Images.
Facing the music
Sirius XM is cheap right now, and not just because the stock chart tells us that the shares are low. Despite the media stock's disappointing financials lately, this isn't breaking news. Sirius XM hasn't posted organic double-digit revenue growth since 2014. Satellite radio has been a hard sell for drivers in this era of connected cars where a growing number of cars on the road have easy access to streaming apps.
However, Sirius XM remains popular. There are roughly 33 million subscribers to the platform. A recent dip in subscribers is problematic, but churn is near historic lows. Sirius XM has turned to the scalability of its business model to acquire proprietary content that's keeping users around. The challenge these days is widening the funnel of new trial users.
In the meantime, Sirius XM is consistently profitable. It's also been aggressively buying back shares with its 10-figure free cash flow, something that is making per-share profitability more attractive than the actual increase in net income. The stock is trading for less than 10 times trailing earnings. It's also using its money-making prowess to pay a dividend that has grown every year since it initiated a payout policy in 2016. It's now yielding a respectable 3.7% for its patient investors.
The meandering top-line growth, leveraged balance sheet, and potential slow fade out of the satellite radio model can't be ignored. However, the market seems to have more than discounted Sirius XM itself. With so many other traits that are in Buffett's wheelhouse it's not a surprise to see him buying as the market was selling.
Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
