This is a story about a cheap stock, and an even cheaper stock.
In a research note Thursday, Morgan Stanley analyst Benjamin Swinburne laid out the investment case for both the satellite radio provider Sirius XM Holdings (ticker: SIRI), and the company’s 76% owner, Liberty SiriusXM (LSXMK).
Part of the Liberty Media group controlled by investor John Malone, Liberty Sirius owns stakes in a variety of Malone-controlled businesses, with most of the value concentrated in Sirius XM, along with a 33% stake in the events business Live Nation Entertainment (LYV), and smaller stakes in other Malone-controlled companies, including the radio station operator iHeartMedia (IHRT); Liberty Braves (BATRA), which controls the Atlanta Braves baseball team; and Liberty Media (FWONA), the auto racing circuit.
As Swinburne notes, the two Sirius stocks have underperformed the market for the year to date, with Sirius off 3% and Liberty Sirius down 2%. Swinburne points out that Sirius is trading below its five-year average valuation as measured by enterprise value to forward Ebitda (earnings before interest, taxes, depreciation, and amortization).
He thinks the company will outperform Street estimates this year on both operating and financial metrics. He sees self-paid subscriber additions of 948,000 this year (a measure which backs out new subscriptions included in car purchases), ahead of the Street consensus of 872,000 and guidance of 800,000, with revenue of $8.575 billion, ahead of the Street at $8.403 billion.
Swinburne notes that Sirius continues to aggressively repurchase shares—the company bought back $516 million in stock in the first quarter. He sees $2.2 billion in buybacks for the full year, or nearly 40% of the non-Liberty shares outstanding. At the current pace, he thinks Liberty’s position in Sirius will eclipse 80% at some point this year, and 90% in 2023. And at that point, he notes, Liberty could simply combine the two companies.
The thing is, Liberty Sirius shares embed a huge discount. Liberty’s stake in Sirius is worth about $18.6 billion, and the Live Nation stake is worth about $6.5 billion—or just over $25 billion before counting the smaller positions—and the stock has a market cap of just $16 billion, a discount of around 35% to the underlying net asset value of the portfolio. Swinburne thinks that the discount will begin to close as Sirius buys back more stock and a potential combination of Sirius and Liberty Sirius becomes more likely.
Swinburne says that Liberty Sirius, which he rates Overweight, is his top pick in the cable and satellite communications group, with nearly 40% upside to his target price of $58. He has an Equal Weight rating on Sirius XM, but with a target of $7.50, implying more than 20% upside.
Sirius XM shares were up 1.4%, at $6.14, in recent trading, while Liberty Sirius is up 2.3%, at $42.86. The S&P 500 was up 0.3%.
Write to Eric J. Savitz at email@example.com