Naked antics, staff squabbles, and thoughtful A-list interviews are key themes in the new Howard Stern Show video feature on the SiriusXM smartphone app. Mixing the low- and high-brow is an old staple for Stern. For stock investors, there’s currently a low-priced way to get exposure to Sirius’ highflying shares, thanks to something called a tracking stock, which trades, mysteriously enough, at close to a 30% discount.
July marks the 10-year anniversary of the merger of Sirius Satellite Radio and XM Satellite Radio, which brought together 18.5 million subscribers and $2.4 billion in yearly revenue, and helped turn steep losses into a trickle of free cash flow. Today, Sirius XM Holdings (ticker: SIRI) boasts 33 million subscribers and will bring in an estimated $5.7 billion in revenue this year and generate $1.5 billion in free cash. It continues to grow, thanks to a healthy pace of new-vehicle sales, and incremental margins on new subscriptions are high.
There are challenges, including competition from music streamers like Spotify Technology (SPOT) and Apple (AAPL). But there are also opportunities, like the video venture, and new platforms that provide on-demand listening flexibility to rival streaming services. One of these is the smartphone app, which adds to growth potential outside of vehicles. Inside vehicles, the 360L system, which debuted this year in a Ram pickup, uses the truck’s 12-inch touchscreen and offers voice search, listening suggestions, and the ability to pay for new subscriptions from the dash. Meanwhile, a rising mix of used cars come with SiriusXM hardware, providing more opportunity to win subscribers.
Sirius stock has returned 81%, versus 66% for the S&P 500 index, since Barron’s recommended it nearly five years ago (“Sirius XM’s Sweet Sound of Success,” Cover Story, Nov. 23, 2013). That’s despite a handful of recent analyst downgrades, most citing valuation, that have lowered the price to $6.65 a share from a peak of over $7.50 in June. At its current price, Sirius trades at 19.8 times this year’s projected free cash flow per share, or 14.5 times predictions for free cash flow per share several years from now, in 2022. That’s a reasonable enough deal. When Jeffrey Wlodarczak, who covers the stock for Pivotal Research Group, lowered his rating to Hold from Buy on June 19 for the first time since 2010, his $7.75 price target was barely above the stock price. Now, it implies 16% upside.
That’s nothing, however, compared with Wlodarczak’s $66 target on Liberty Media Corp. Series A SiriusXM (LSXMA), which suggests nearly 50% upside.
Liberty Media, the investment vehicle controlled by John Malone, owns a controlling stake in Sirius, and investors can ride the value of that stake via a tracking stock. Malone has a reputation for using complex capital structures to a profitable end for his investors, which Barron’s highlighted in a cover story two years ago (“Liberty Media: Better Than Berkshire,”Oct. 1, 2016). True to form, his Sirius position is a bit of a head-scratcher, but worth doing some quick math on.
The tracking stock comes in three classes, Series A has 102.7 million shares outstanding at a recent $44.28, which comes out to $4.55 billion. There’s also a Liberty Media Corp. Series B SiriusXM (LSXMB) worth $449 million, and a Liberty Media Corp. Series C SiriusXM (LSXMK) worth $9.87 billion. Those add up to about $14.9 billion. The classes represent different voting rights: negligible for A and nonexistent for C; the Bs are supervoting shares that aren’t up for grabs. (For the curious, the Series C ticker ends in a K because in the language of Nasdaq’s fifth-letter identifiers, C is reserved for a line of exchange-traded funds called NextShares, and K means nonvoting.) Sirius has a recent market value of $29.8 billion, so Liberty Sirius’ 70.6% stake should be worth $21 billion.
It’s not uncommon for tracking stocks to trade at discounts of 10% or so to the value of assets they’re linked to. Why? Because they don’t pay dividends, some institutional investors won’t buy them, and they’re just plain weird. But the $14.9 billion value for Liberty Sirius works out to a 29% discount to the $21 billion Sirius stake, much wider than usual. And while investors can debate the value of underlying assets for Liberty Media’s other two trackers, Liberty Media Corp. Series A Liberty Braves (BATRA) and Liberty Formula One (FWONA), the price of Sirius stock at any given moment is rather more knowable than the true value of, say, the Atlanta Braves baseball team, its stadium, and real estate deals.
Arbitrageurs ought to make quick work of that discount, but they like to buy the thing that is relatively cheap while selling short the thing that is relatively pricey, and shorting Sirius is expensive because Liberty doesn’t lend out its stock for the purpose. That leaves Liberty with options like stock buybacks; it purchased 100 million shares last quarter.
“We effectively bought the SiriusXM at a look-through price of $4.36 a share, which we consider pretty darn attractive,” said CEO Gregory Maffei on the earnings call. Macquarie Research analyst Amy Yong expects Liberty to take its stake in Sirius to well over 80% by 2020, a level at which it will gain access to Sirius cash and stored-up tax write-offs. She’s bullish on Sirius but predicts more upside for Liberty Sirius—38% to $61.
Wlodarczak at Pivotal sees potential for shareholders to make out in a takeover, as they did in another Malone venture, DirecTV. “The endgame for DirecTV was to sell to AT&T [T],” says Wlodarczak. “For Sirius, it could be to sell to Verizon Communications [VZ].” In that scenario, Verizon would get Sirius’ ample free cash flow to use for dividend support, its excess spectrum to repurpose, and its relationships with car makers.
John Maloney, co-founder of Manhattan money manager M&R Capital, expects the discount to narrow gradually, or all at once through a deal. “I’ve made a lot of money with Malone over the years,” he says. John Tinker, an analyst at Gabelli & Co., sees a clear motivation for Malone to address the discount on Liberty SiriusXM: “It’s his largest personal position.”