It has been exactly one month since I wrote for three reasons Sirius XM Holdings (NASDAQ: SIRI) may return in June. The country’s only satellite radio provider is fulfilling this potential. Shares are up 36% in that time, handily beating the market.
That happiness has not been the default setting for Sirius XM investors. The stock continues to lag in 2024, falling more than a third since the start of the year. Things may be different now that there is a whiff of optimism. Let’s go through some of the reasons why the second half of this year may be more like last month than the last six months.
1. A rare good reverse split is coming
Sirius XM expects to execute a 1-for-10 reverse stock split this quarter. Unlike typical well-received stock splits, the market doesn’t like it when a company goes the other way. However, it makes sense here to replace every 10 shares of Sirius XM for a new share initially valued at 10 times its previous value.
Sirius XM is in the process of combining with it Liberty Sirius XM Group (NASDAQ: LSXMA) (NASDAQ: LSXMB) (NASDAQ: LSXMK) stock tracking. The combination is long overdue, as Sirius XM’s majority interest group has seen its tracking stock historically trade at a discount to its better-traded common stock.
The transaction is expected to close sometime in the third quarter, which began earlier this week. The move will remove the confusion that investors sometimes have on the size of the different flavors of the satrad company. Another benefit of the transaction is that it will transform Sirius XM from a penny stock that is a hotbed for speculators to one that institutional investors take more seriously.
2. Determination of a bargain
Sirius XM has bounced back from the 11-year low it hit early last month, but the stock is still cheap. Even after last month’s increase, you can stake your claim on Sirius XM for less than 11 times trailing earnings. You’re also getting Sirius XM for 11 times the $1.2 billion in free cash flow it expects to generate this year.
A reality check is always in order for stocks to trade at reasonable multiples in an otherwise inflated market. Sirius XM has posted single-digit percentage organic revenue growth for nearly a decade. Revenues even fell last year — down 0.6% — but they’ve been slightly positive in consecutive quarters.
3. The dividend is attractive
The atypical rally in stocks over the past four weeks has been the fruit of many highs, but it has eaten into stock yields. Sirius XM was yielding nearly 4.5% at its low point last month. Now it is 3%.
Stay with me. Sirius XM has spent a quarterly distribution since 2016. Despite snaking top-line growth, it has been able to increase the payout each year, nearly tripling since the initial filing. Will it raise the dividend again later this year? Either way, Sirius XM’s quarterly payouts will start to look a lot more attractive once the Federal Reserve starts cutting rates.
4. The basics can be improved
Sirius XM has great reach, but the wingspan seems to have stalled with its 33 million total subscribers. Reports of Sirius XM’s demise have survived recessions, a pandemic that caused people to use their cars less, and even the golden age of connected vehicles.
What can make Sirius XM grow again? Companies are calling employees to work in the office, and this is definitely a positive for live satellite radio. A strong summer for road trips also plays into the appeal of Sirius XM’s platform. AAA predicts a 5% increase in travel this week for the Independence Day holiday from last year and a 10% increase from the year before the 2019 pandemic.
5. Higher prices can lead to higher stock prices
Bellwether broadcast Spotify (NYSE: SPOT) turned heads last month by raising prices for its service by $1 to $3 a month. Whether Sirius XM uses this as an opportunity to raise its monthly rates for the first time in 16 months remains to be seen, but it’s a win-win situation for the media stock.
Unlike primarily streaming music platforms, Sirius XM’s model is more scalable. It relies on its massive user base to provide proprietary content that doesn’t have the same music licensing fees that can erode margins. It is original. It’s a monopoly. If people are willing to pay a little more for audio entertainment, then Sirius XM will make a lot more in the end. It’s time to turn up the volume.
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Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Spotify Technology. The Motley Fool has a disclosure policy.
5 Reasons Sirius XM Could Keep Spinning in the Second Half of 2024 was originally published by The Motley Fool