One of the primary obstacles hindering one of the year’s worst-performing large-cap stocks is now becoming a thing of the past. Sirius XM Holdings has finalized its merger with John Malone’s controlling interest in the satellite radio company. The Liberty Sirius XM Group tracking shares, which historically have been a distraction and traded at a significant discount compared to the common shares, have officially been incorporated into the main company following Monday’s market closure.
This transition may lead to some temporary confusion. The 1-for-10 reverse stock split that occurred at the market’s opening on Tuesday might be unsettling, especially considering the bleak outcomes for many companies that have resorted to this usually desperate move to maintain listing eligibility. While the share count itself remains unchanged, the increased float of Sirius XM shares could influence short-term trading dynamics for both long and short positions. Some arbitrageurs, who were invested in the tracking shares to profit from the diminishing discount over the past two years, might now choose to sell, given that their objectives have been achieved.
There’s a lot unfolding at the moment. Once the dust settles, this development could prove beneficial for beleaguered Sirius XM shareholders. Let’s explore why this might represent the turning point that opportunistic investors have been anticipating.
A new sound
This isn’t Sirius XM’s first attempt to simplify matters by consolidating two publicly traded entities. Fifteen years ago, regulators approved the merger of Sirius and its competitor XM, both of which were burgeoning but unprofitable satellite radio providers, to form a satellite radio monopoly. Today, Sirius XM is no longer considered a growth stock, having not achieved organic double-digit revenue growth in a decade. Nonetheless, it has evolved into a consistently profitable media powerhouse.
The stock has suffered a 51% decline in its value this year, placing it among just five stocks with market caps exceeding $10 billion to have been slashed by more than half in 2024. The long-awaited conclusion of the tracking shares hasn’t generated excitement among investors. Furthermore, the business hasn’t significantly deteriorated since the start of the year. The business model resembles a radio track that’s been gradually fading out, with anticipated revenue growth and a subscriber count now marginally negative. However, this doesn’t justify Sirius XM’s market cap being halved this year or its debt-laden enterprise value declining by more than 25% during the same period.
A perfect price for an imperfect stock
On Tuesday, Sirius XM reaffirmed its previous guidance, projecting $8.75 billion in revenue and $2.7 billion in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for 2024. The company did revise its free-cash-flow forecast from $1.2 billion to $1 billion, but this $200 million reduction is related to the recent transaction and historical outflows at Liberty Sirius XM Holdings. The core business remains intact.
Income investors will appreciate that the substantial dividend will persist. The reverse split has appropriately adjusted the per-share payout tenfold to approximately $0.27 per share throughout the year. Sirius XM continues to offer a yield of just over 4%, as it did on Monday.
Nevertheless, questions linger. Sirius XM boasts an impressive 33 million subscribers, but it has 618,000 fewer accounts compared to the beginning of the year. While churn rates are near historic lows, the company struggles to attract younger drivers with the same enthusiasm as previous generations. This doesn’t necessarily spell disaster.
Sirius XM has time on its side. The profitability of its scalable business model will be tested if revenue and subscribers decline gradually, but generating substantial free cash flow provides the company with the opportunity and resources to steer back toward growth.
The valuation remains favorable. Sirius XM is trading at less than nine times earnings. Analysts anticipate a return to growth in both revenue and earnings in 2025, even if that expectation seems overly optimistic in the current bearish climate for the stock. Sirius XM is an undervalued and unique media stock that the market has overlooked in 2024. Once the initial turbulence from Tuesday’s reverse split subsides, it might be an opportune moment to reconsider this particular giant.
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