Berkshire Hathaway Chairman Warren Buffett is a value investor at his core. Value investing involves finding stocks trading below their intrinsic value and buying them at a discount. While the concept often sounds like a no-brainer, value investing is much more difficult than it sounds because many stocks are on sale for a reason. Investors will grapple over whether a stock is truly of value or whether it’s a value trap.
One equity holding in Berkshire’s portfolio has found itself in the middle of this very argument: Sirius XM Holdings (SIRI -4.32%). Shares of the digital audio company have fallen nearly 58% this year, and some Wall Street analysts recently downgraded it. Despite Sirius’ struggles, Berkshire has been buying the stock all year long. Does Warren Buffett know something Wall Street doesn’t?
Let’s take a look.
Bad news for a poor-performing stock
Sirius operates Sirius satellite radio and the music streaming service Pandora. Earlier this year, the company split off from Liberty Media, attempting to simplify its corporate structure, and also conducted a reverse 1-for-10 stock split to make its shares more attractive to investors. The company has also embarked on a new strategy that involves building out its podcast platform by purchasing exclusive distribution and ad sales rights from large brands like Call Her Daddy and Smartless.
The new strategy caught the attention of Buffett, who loves a good turnaround story. It also doesn’t hurt that Sirius is paying a hearty 4.6% dividend yield and contemplating share repurchases. This allows investors to collect passive income while the company executes a turnaround story.
Recently, however, Sirius demonstrated that most turnaround stories require patience. The company provided a strategic update and updated guidance for 2025. Sirius expects next year’s revenue to come in around $8.5 billion, which fell short of prior analyst estimates. This would represent a decrease from projected 2024 revenue and is concerning because the company has experienced declining subscribers at times this year.
In its strategic update, Sirius also said it is targeting $200 million of run-rate savings by year-end and further debt reduction of roughly $700. Management also said it is committed to maintaining the company’s dividend.
The updated guidance led to several downgrades from analysts, who also lowered their price targets, citing headwinds driven by the disappointing guidance and subscriber trends. In many cases, companies trying to execute a turnaround struggle if they can’t show the potential to grow revenue and earnings because investors doubt the strength of the core business.
What does Warren Buffett know?
Berkshire has significantly increased its stake in Sirius this year. It’s possible Buffett and his team saw the recent guidance from Sirius and sold the stock or reduced its position. However, I think Buffett and Berkshire are likely invested in Sirius for the long haul. After all, these turnaround stories can take several years to pan out.
Buffett has been a long-term investor in other longer-term turnaround stocks with strong dividends like Kraft Heinz and Citigroup. Sirius’ board of directors has also authorized a share repurchase program, so it could pull that lever at some point, too.
While I would like to see better subscriber trends, the company has a plan, is generating significant free cash flow, lowering debt, and paying a healthy dividend. Remember, most analysts are looking out 12 to 18 months, while Buffett may be content to hold a stock for years before it pays off, so both groups could be right. Several analysts are still bullish on Sirius’ long-term prospects.
With the stock trading at roughly 8 times earnings, I think long-term investors can afford to give management more time to right the ship.
Citigroup is an advertising partner of Motley Fool Money. Bram Berkowitz has positions in Citigroup. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.
