The biggest thing holding back one of this year's worst large-cap performers is now fading in the rearview mirror. Sirius XM Holdings (SIRI) has now completed its combination with media mogul John Malone's controlling stake in the satellite radio platform. The Liberty Sirius XM Group tracking shares that were a distraction and historically traded at a wide discount to the common shares were officially absorbed into the main company after Monday's market close.
There will be some transitory confusion. The 1-for-10 reverse stock split that took place at Tuesday's opening may prove jarring, especially given the poor fate of most companies that have chosen to go this typically desperate route for listing eligibility purposes. The share count itself isn't expanding, but with a larger float of Sirius XM it could impact near-term trading behavior on the long and short side of the trade. Some arbs that were in the tracking shares to cash in on the gradually thinning discount over the last two years could sell now that the mission is complete.
There's a lot happening right now. It should be worth it for suffering Sirius XM shareholders by the time the dust clears. Let's dive into why this could be the bottom that opportunists were waiting for.
A new sound
This isn't the first time that Sirius XM has tried to streamline a situation by combining two publicly traded entities. There were two growing but profitless satellite radio providers until regulators approved the combination of Sirius and rival XM to create a monopoly in satellite radio 15 years ago. Sirius XM is no longer a growth stock. It hasn't posted organic double-digit revenue growth in 10 years. However, the platform has become a predictably profitable media giant.
The stock has shed 51% of its value this year, making it one of just five stocks with market caps north of $10 billion to be cut by more than half in 2024. The long-anticipated end of the tracking shares hasn't excited the investing community. It's also not as if the business has deteriorated substantially since the start of this year. The business model is a radio track that's been slowly fading out for a long time. No one is surprised by revenue growth and now the subscriber count turning marginally negative. It doesn't mean that Sirius XM's market cap deserves to be halved this year or its debt-saddled enterprise value off by more than 25% in that time.
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A perfect price for an imperfect stock
Sirius XM reiterated its earlier guidance on Tuesday. It continues to model $8.75 billion in revenue and $2.7 billion in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2024. It did adjust its free-cash-flow projection from $1.2 billion to $1 billion, but that $200 million haircut is related to the transaction and historical outflows at Liberty Sirius XM Holdings. The business itself is not impaired.
Income investors will note that the chunky dividend will continue. The reverse split is appropriately tweaking the per-share payout tenfold to roughly $0.27 a share over the course of the year. Sirius XM still yields just over 4% the way it did on Monday.
The question marks also remain. Sirius XM has a whopping 33 million subscribers, but it has 618,000 fewer accounts than it had when the year began. Churn is near historic lows, but Sirius XM can't get younger drivers to hop on the platform with the same gusto as those who signed on a generation ago. It doesn't mean that things will end badly.
Sirius XM has time. The profitability of this scalable business model will be tested if revenue and subscribers shrink slowly, but generating 10-figure free cash flow gives it time to get it right and the means to buy its way back to growth.
The valuation continues to be kind. Sirius XM is trading for less than nine times earnings. Analysts see a return to top- and bottom-line growth in 2025, even if that may seem misguided in this otherwise bearish climate for the stock. Sirius XM is a cheap and differentiated media stock that the market has forgotten about in 2024. As soon as the initial malaise of Tuesday's reverse split passes, it could be a good time to remember this particular titan again.
