Few investors have captured the attention of professional and casual investors alike like $Berkshire Hathaway(BRK.A)$ CEO Warren Buffett. Earlier this month, Berkshire Hathaway released its fiscal third-quarter operating results. When Berkshire filed its quarterly report, it wasn't known exactly what stocks the company had sold and which companies it had purchased. These questions were answered last Tuesday, November 14, when the fund manager filed its highly anticipated Form 13F.
While Buffett's firm completely exited its stakes in seven major brand-name companies, including $General Motors(GM)$ , $United Parcel Service Inc(UPS)$ , $Johnson & Johnson(JNJ)$ , and $Procter & Gamble(PG)$ , among others, it added one stock to its holdings.
A familiar value stock re-entered Berkshire Hathaway's portfolio
In the quarter ending September, Buffett and team purchased 9,683,224 shares of satellite radio operator $Sirius XM(SIRI)$ , valued at about $47.35 million as of the close time on November 14, 2023.
This is not the first time Berkshire Hathaway has partnered with Sirius XM. Berkshire Hathaway opened a position in Sirius XM in the fourth quarter of 2016 and exited completely in the fourth quarter of 2021.
If you're looking for the main reason why Berkshire Hathaway initially exited its Sirius XM Holdings shares in the fourth quarter of 2021, the outlook for interest rates is probably the top reason. While interest rates are at historically low levels in 2021, the rapid growth of the M2 money supply during the pandemic is a clear indication that high inflation and eventual interest rate hikes are on the horizon. Sirius XM has a considerable amount of debt on its balance sheet, which means that the cost of future transactions, major projects, and refinancing campaigns will be more expensive.
On top of that, Sirius XM is a highly cyclical company. Investors are starting to see some signs in the second half of 2021 that the U.S. may be in a recession. In particular, the slowdown in ad spending has sparked concerns about broadcast operators, which typically rely on ad revenue, which could incite Buffett and his team to leave.
It’s the Time Picking Sirius XM Stock
Sirius XM was Berkshire Hathaway's top stock to buy in the quarter ending September, and it appears that four catalysts are driving Buffett's (and his team's) bullish sentiment.
First, Sirius XM is a legal monopoly. While it does compete with terrestrial and online radio operators for listeners, no other company is licensed as a satellite radio operator. This distinction gives Sirius XM superior subscription pricing power and provides the company with an impenetrable moat.
The second reason is the company's cost structure. While some costs fluctuate on a quarterly basis (e.g., royalties and talent acquisition), others (e.g., transmission costs and equipment) are relatively fixed and/or predictable.
The third core catalyst is that while most broadcast operators are overly reliant on highly cyclical advertising revenues, only 19% of Sirius XM's sales through the first nine months of 2023 come from advertising. By comparison, 77% of Sirius XM's revenue through September came from subscriptions. To sum up, Sirius XM's revenue streams are less resilient but more recession-proof than other radio operators.
The fourth catalyst driving Buffett and his team to take action was Sirius XM's historically cheap valuation. During the third quarter, Sirius XM stock traded at a price-to-earnings ratio of 13 to 15 times, well below the average expected price-to-earnings ratio of 22 times over the past five years.
The icing on the cake for Prophet of Omaha is that Sirius XM Holdings also pays a dividend. While the company's 2.2% yield won't surprise anyone, it has an above-average dividend payout relative to the benchmark $S&P 500(.SPX)$ .
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