To The Moon

$Sirius XM(SIRI)$

Finally, we have one of the most intriguing insider purchases: SiriusXM Holdings (SIRI), which is currently trading at $20.03 and has seen a nearly 58% decline over the past year. In recent months, Warren Buffett has made multiple purchases of the stock, buying shares three times in October and again in December. If we look at his purchase history, it’s a bit inconsistent. He started a position in the summer of 2023, then added more shares, sold a significant amount, bought again, and finally added another 117 million shares. His average purchase price now stands at around $23.80, which is close to the current share price.

Sirius XM is receiving significant investor attention due to legendary investor Warren Buffett’s decision to purchase the stock. As is often the case when Buffett invests in a company, it attracts considerable interest because of his stellar reputation. However, I decided to perform my own due diligence to evaluate Sirius XM’s potential. Specifically, I wanted to conduct a discounted cash flow (DCF) analysis to determine if the stock is truly undervalued, which aligns with Buffett’s preference for value investments. Let’s dive into the analysis.

Fundamental

Looking at the company's fundamentals, we can see that revenue per share has grown moderately over the past decade, from $6.10 to around $23.20 in 2023. Earnings have been volatile, but for 2023, they came in at $3.26 per share. However, if we check the earnings estimates, we see that analysts project negative earnings for 2024, with only modest recovery expected in the following years. There’s very little growth forecast for the company, making it a somewhat concerning investment.

Free Cash Flow

In the third quarter of 2024, SiriusXM reported free cash flow of $93 million, a significant decrease from $291 million in the same period the previous year.

This decline was primarily due to approximately $72 million in transaction-related costs associated with the Liberty Media deal, reduced cash receipts, increased programming payments, and higher capital expenditures. These factors were partially offset by lower cash taxes. Despite the quarterly decline, SiriusXM reaffirmed its full-year 2024 guidance, projecting free cash flow of approximately $1 billion.

SiriusXM reported free cash flow of $93 million for Q3 2024, down from $291 million in Q3 2023. This 68% year-over-year drop was primarily attributed to:Transaction Costs: Approximately $72 million in expenses related to the Liberty Media deal.Lower Cash Receipts: Declining subscriber revenue due to competitive pressures and shifts in consumer behavior.Higher Operating Costs: Increased payments for programming and royalties.Capital Expenditures: Investments in technology and infrastructure to support digital and automotive initiatives.

SiriusXM’s declining free cash flow reflects a combination of structural challenges, increased competition, and strategic spending. While these investments may drive long-term growth, the short-term cash flow pressure highlights the need for careful financial management, especially given the company’s substantial debt obligations.

Discounted Cash Flow Valuation for Sirius XM

DCF model for Sirius XM, populated with various estimates, assumptions, and inputs. One key input is the free cash flow (FCF) projections for 2024 to 2028. According to Wall Street analyst estimates:

• 2024: $1.02 billion

• 2025: $1.16 billion

• 2026: $1.39 billion

• 2027: $1.46 billion

• 2028: $1.62 billion

These figures have been incorporated into my valuation model. Additional inputs, including the beta, market cap, total debt, and cash balance, were sourced from Yahoo Finance, with links provided for reference.

Key Financial Observations

• Market Cap: $7.228 billion

• Total Debt: $10.73 billion This is notable since Sirius XM’s total debt exceeds its market capitalization—an uncommon scenario worth examining further.

Free Cash Flow Growth Forecast

• 2024–2028: Analysts project a 12.3% compound annual growth rate (CAGR).

• 2029–2034: I’ve conservatively estimated a growth rate of 6.15%.

• 2035 onward: I forecast a steady 5% growth rate.

Weighted Average Cost of Capital (WACC)

To calculate the present value of projected cash flows, I used a WACC of 9.14%, derived from:

• Cost of debt: 8.5%

• Cost of equity: 11%, calculated using the Capital Asset Pricing Model (CAPM)Beta: 1.05Risk-free rate: 4.75%Market risk premium: 6%

• Capital structure assumption: 75% debt and 25% equity. I assume Sirius XM may aim to reduce its debt relative to equity over time.

By discounting the future cash flows back to the present using these assumptions, we can evaluate whether Sirius XM is currently undervalued based on intrinsic value. Let’s continue with the detailed analysis and interpretation of the results.

Valuation

I’m assuming that Sirius XM will aim to better balance its financial structure by reducing its debt relative to its market capitalization. Currently, the company’s debt exceeds 100% of its market cap, but I’ve modeled it at 75% for this analysis. After discounting future cash flows to the present, I calculate Sirius XM’s value of operations at $35 billion. Adjusting for cash and subtracting debt, the resulting equity value is $24.7 billion. Dividing this by the 339 million shares outstanding gives an intrinsic value per share of approximately $73, compared to the current market price of $21. This suggests significant undervaluation and helps explain why Warren Buffett finds the stock attractive.

Dividend Yield

SiriusXM is a major dividend payer, offering a starting dividend yield of about 4.67%. However, it’s important to note that short interest is relatively high, at about 5.69%, indicating that many institutions are betting against the stock, which isn’t usually a positive sign.

Insider Buying

Siri has experienced notable insider trading activity over the past year. Notably, Berkshire Hathaway Inc., led by Warren Buffett, has made significant purchases:

• December 17, 2024: Acquired 4,963,844 shares at an average price of $21.60 per share, totaling approximately $107.23 million.

• October 29, 2024: Purchased 2,227,939 shares at an average price of $27.24 per share, amounting to roughly $60.69 million.

In total, insiders have bought approximately 12.3 million shares in the last 6 months, with a cumulative value of around $297 million.

Buffet Added More

Buffett is well-known for investing in undervalued businesses, even those with significant debt, as his vast capital resources allow him to potentially acquire companies outright, pay off their debt, and operate them debt-free. Additionally, Buffett’s access to capital at a lower cost than Sirius XM’s enables the business to further reduce its cost of capital under his ownership, improving returns.

Buffett also evaluates investments differently from traditional methods. Instead of using the weighted average cost of capital (WACC) to discount cash flows, he often uses the rate of return on a 10-year government bond. This reflects his perspective that investing in stocks and government bonds are alternative options. If bond yields are unusually low, he adjusts them higher for his calculations, and vice versa. This approach contrasts with the higher discount rates many analysts, including myself, typically use.

Conclusion

Based on my calculations, Sirius XM appears undervalued. Even with a significant margin of safety applied, the intrinsic value remains higher than the current market price. However, this doesn’t guarantee the stock price will rise. Markets may disagree with my valuation—or Buffett’s—indefinitely, and the stock could remain undervalued for an extended period. As always, I encourage you to perform your own due diligence and remember that undervaluation doesn’t necessarily mean immediate price appreciation.

This is certainly one of the more interesting insider purchases, but it’s not a stock I’m personally interested in right now. I’d love to hear your thoughts on these three stocks that have recently seen insider buying.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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