Sometimes the market presents unique opportunities to get an even bigger discount on a stock that is already trading at an attractive price. Warren Buffett Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) seems to be using one of these possibilities.
Berkshire Hathaway bought a total of $167.5 million Liberty SiriusXM (NASDAQ:LSXMA) (NASDAQ:LSXMK) tracking stock in April, bringing its total holdings to about $2.6 billion. The tracking inventory closely follows Liberty Media’s position in SiriusXM (NASDAQ:SIRI), of which the media company owns 83%. Berkshire is also an investor in Sirius
But there’s a good reason for Buffett to choose Liberty Tracking stock over Sirius XM stock. There is a nice discount.
How investors can get a discount on Sirius XM
Back in December, Sirius XM and Liberty agreed to merge the two stocks. The merger is expected to close in the third quarter, with Liberty SiriusXM shareholders receiving 8.4 Sirius XM shares per share of tracking shares they currently own.
At current market prices, 8.4 shares of Sirius XM are worth about $26.20. Meanwhile, Liberty Tracking shares are trading at around $25.13. Therefore, investors who purchase Liberty SiriusXM will receive an additional discount of (approximately) 4% on the shares.
This discount used to be much larger. When the merger was first announced in December, investors could get a massive 39% discount if they bought the tracking stock instead of Sirius XM.
But there were good reasons for this discount. Strong short interest in Sirius XM over the last year made the stock difficult to borrow. This hindered price discovery and caused shares to trade above their market value. Liberty SiriusXM’s tracking stock therefore better reflected the market value of Sirius XM’s operations. Since the short selling interest is due to the falling stock price of Sirius
But there is still a small discount. And that reflects that there is some risk to directly owning Sirius XM stock. The merger is still months away and there is still a chance that Sirius shareholders will. However, as time goes on, this seems increasingly unlikely. In all likelihood, the merger will go ahead as planned.
Therefore, investors can currently get a discount on Sirius XM stock, albeit a smaller discount than before. Should they follow Buffett and Berkshire Hathaway into stocks?
Is Sirius XM worth owning?
Sirius XM is the largest satellite radio company in the United States, serving 33 million subscribers. Unlike terrestrial radio stations, which make the majority of their revenue from on-air advertising, Sirius makes the majority of its money from subscriptions.
However, Sirius has been having trouble growing lately. The company’s subscriber revenue fell slightly year-over-year in the first quarter, although advertising revenue, primarily from streaming service Pandora, offset the decline. Subscriber churn also increased by a tenth of a percentage point, but that’s not unusual seasonality for Sirius.
However, the company may be on the verge of a turnaround and boost sales growth again. The top of Sirius’ subscriber funnel – free trials for new car buyers – grew to 7.5 million at the end of the first quarter. This compares to 7.2 million at the end of last year and the end of the first quarter of 2023. Management expects this to accelerate subscriber growth in the second half of the year.
The biggest challenge for Sirius XM is the growth of streaming services. While Sirius benefits from far more favorable economics than streaming, resulting in higher profit margins and free cash flow conversion, competition is slowing subscriber growth. To that end, the company acquired Pandora in 2019 and offers a streaming version of its satellite radio service. The company has also invested heavily in podcasts and revamped its mobile app. Programmatic advertising sales rose 29% in streaming and podcasting in the first quarter, helping overall advertising revenue rise 7% year-over-year.
The revamped app and efforts to acquire more exclusive podcasts could boost subscriber conversion through free trials. The company is also working with manufacturers to incorporate the latest 360L system, which offers an improved user experience, including more personalized listening recommendations. Sirius has seen a higher conversion rate among test participants with the 360L than without.
With a growing funnel of new subscribers, increasing digital advertising sales, and increasing investment in podcasting, Sirius appears poised to return to subscriber growth. The stock now trades at just 10.1 times forward earnings estimates and an EV/EBITDA ratio of just 8.2. If you get another discount by purchasing Liberty Media’s tracking stock, it looks even more attractive.
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Adam Levy 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.
Warren Buffett gets a discount on this great value stock. So you can too. was originally published by The Motley Fool