I argued last month that given a price-to-free cash flow ratio of 10, “dividend payments of about 4.3% per year” and plans “to repurchase $1.2 billion of stock… Sirius XM Holdings (NASDAQ: SIRI) The shares are only getting stronger.”
It turned out that someone was listening.
Shares of Sirius stock rose 8.1% through 10:45 a.m. ET on Monday after Warren Buffett’s investment vehicle Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) revealed in an SEC filing that it has increased its stake in the satellite radio company.
What has Buffett bought now?
More specifically, Berkshire Hathaway informed the SEC that it purchased 3.6 million Sirius shares from October 9 to 11. Added to its existing holdings, this gives Berkshire a stake of 108.7 million shares in the company, 32% of all outstanding shares.
(To be even more specific, data from S&P Global Market Intelligence shows that Berkshire directly owns about 6.6% of Sirius stock, while another 25.5% is owned by New England Asset Management, a subsidiary of General Re Corporation, which is in turn a subsidiary of Berkshire Hathaway.)
Should you also buy Sirius shares?
Clearly, Warren Buffett sees something he likes in Sirius stock, but should you like Sirius stock too?
Sirius shares are up nearly 20% since I first highlighted the stock as a potential buy a month ago. But there is still value in it. Sirius sells for a price-to-earnings ratio of just 7, but most analysts covering the stock see earnings growing 12% per year over the next five years.
Granted, Sirius has a lot of debt – enough to make its enterprise value about twice its apparent market value – and this cannot be ignored. However, free cash flow also exceeds reported net profit, resulting in an enterprise value to free cash flow ratio of 15.
With an expected growth of 12% and a dividend that still yields a good 4.3%, Sirius remains cheap enough to buy.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
Why Sirius XM Stock Just Soared 8% was originally published by The Motley Fool
