Warren Buffett is all about Sirius XM and people are curious why. Let’s sum it up in his own words.
First, it’s not about the recent 1-for-10 reverse stock split.”[Stock splits] don’t change the underlying business,” Buffett has often reminded people. What drives this move?
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Buffett has a deep understanding of Sirius XM’s business. He is no stranger to subscription-based models. “As a former newspaper boy,” Buffett once said, he knows how subscription revenue works. Plus, he’s a fan of the service. Rumor has it that he is especially fond of the ‘Siriusly Sinatra’ channel. And it’s not just the music; Buffett values companies with strong market positions. Sirius XM? It has a monopoly on satellite radio in the US and has a solid place in the podcast world.
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Then there is the management factor. Buffett famously said, “Our favorite holding period is forever,” but only if a company has “excellent management.” Sirius XM CEO Jennifer Witz has been with the company since 2002 and rose to her current position. She has the experience and, most importantly, she’s in the game: she owns almost 12.1 million shares. That kind of commitment from leadership is something that Buffett respects.
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Ultimately, it all comes down to the price. Buffett learned from Benjamin Graham, the “father of value investing.” He is still a value investor through and through. “I will only buy the stock if its price is attractive relative to the lower end of my estimated profit margin,” Buffett once explained. Sirius XM trades at a price-to-earnings ratio of 6.4, one of the cheapest in Berkshire Hathaway’s portfolio. With a price-earnings-growth ratio (PEG) of 0.64, it is clear why Buffett finds this attractive.
So why is Buffett buying Sirius XM hand over fist? Simple. He understands the business, trusts management and thinks the price is right.
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This article What’s Driving Warren Buffett’s Massive Investment in Sirius XM’s $8 Billion Market Cap originally appeared on Benzinga.com
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