1 Warren Buffett’s stock will fall 26% in 2024. Is it a bargain buy?

Warren Buffett takes control berkshire hathaway In 1965, the company began filling its portfolio with stocks of publicly traded companies and businesses it controlled. Investors from all walks of life are paying close attention to Buffett, as Berkshire Hathaway stock has returned 4,121,700% since he took over.

A key element of Berkshire’s strategy involves acquiring great companies at fair prices and holding them for the long term. Berkshire had more sells than buys last year, but one stock I was eager to buy was: SiriusXM Holdings (SIRI -0.73%)America’s only satellite radio provider.

In the last six months of 2023, Berkshire purchased 40.2 million shares of SiriusXM stock. Investments are not going well so far. SiriusXM stock is down 26% since the end of 2023, so you could potentially invest at an even lower price than Buffett. Let’s take a look at the attractiveness of a stock to determine if it’s a buy on the spur of the moment.

Why SiriusXM is a Buffett stock

Mr. Buffett famously values ​​companies with economic moats that can reduce competition. Sirius XM has to compete with traditional radio and online streaming services, but it is the only satellite radio operator allowed to operate in the United States.

If you don’t regularly drive long distances, satellite radio may not seem important. For millions of users, Sirius XM is more than just the preferred choice for talk radio, sports, and music. This is often the only viable option for the customer’s preferred programming. So in December of last year, he had 31.9 million paying subscribers, and including potential self-pay customers still in promotional periods, he had 33.9 million.

The company, the only satellite radio provider in the U.S., had enough pricing power to increase its monthly revenue per user by 16% from 2018 to $15.56 in 2023. Satellites tend to fly around frequently, so subscription fees aren’t increasing right away, but neither are expenses. for a long time.

SIRI EPS Diluted (TTM) Data by YCharts

2019 acquisition of Pandora aside, returning profits to investors is a top priority for SiriusXM. The company’s outstanding shares have decreased by 17% over the past five years. The lower denominator accelerated modest growth in net income, with earnings per share increasing by a strong 45% since 2019.

Berkshire Hathaway doesn’t pay a dividend, but I like buying stocks that do. At recent prices, Sirius XM has a dividend yield of 2.7%. The quarterly dividend has increased 120% over the past five years, and the payout remains generous. The company needed just 32% of the $1.2 billion in free cash flow it generated last year to meet its dividend commitment.

Another box that Sirius XM ticks with Buffett at the moment is its relatively low valuation. Shares are down about 26% this year, but trade at just 12.5 times earnings. Market expectations are so low that long-term investors could be far ahead in the long run, even if annual returns are increasing slightly each year at a low-single-digit rate.

Image source: Getty Images.

Buy it on the spur of the moment?

Being the only satellite radio provider in the U.S. isn’t as strong of an advantage as it was just a few years ago, and streaming services such as: spotify I’m having lunch on SiriusXM. Spotify ended 2023 with an 11% increase in monthly active users in North America compared to the end of 2022.

Promotional subscriptions that come with new cars are the traditional way Sirius XM acquires most of its paying subscribers. Unfortunately for SiriusXM, his 5G network in America is now robust enough that few automakers build vehicles equipped with satellite radio hardware. At the end of 2018, there were 5.1 million potential subscribers taking advantage of paid promotions. This number has fallen sharply over the past five years, to just 1.9 million by the end of 2023.

Sirius XM released a new smartphone app last year, but it doesn’t compete well with apps like: apple Music and Spotify. The company ended his 2023 with 31.9 million self-pay subscribers, which was down from his two years prior.

The company’s attempts to expand beyond satellite radio with its acquisition of Pandora in 2019 have been unsuccessful. Pandora ended 2023 with fewer paid members than at the end of 2019.

Sirius XM is highly profitable and has a low revenue multiple, but growth will become increasingly difficult to achieve as fewer new cars are equipped with satellite radio hardware.

Stocks in stagnant but profitable companies can generate market-beating returns over time, but only if purchased at very low valuations. Until this stock drops to a single-digit earnings multiple, it’s best to watch its story unfold from a safe distance.