Is This A Classic Value Play?
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
One of the most interesting value stocks around these days is John Malone’s holding company, Liberty Media (NASDAQ: STRZA). Liberty Media has been on a roll lately, shooting up in share value and making interesting acquisitions.
Anybody that’s been paying attention to the financial news lately knows that Liberty Media is close to getting control of Sirius XM (NASDAQ: SIRI). Even though Sirius is cheap, it is also a very profitable company.
On November 23, Sirius was trading at $2.78 a share, yet its revenues have nearly tripled in the last three years. Sirius’ revenues have risen from just under $1 billion in early 2008 to $3.29 billion on September 30. If that wasn’t enough, Sirius’ return on equity ratio was reported at 163.4% on September 30. Sirius has also been able to increase its cash flow from operations over the past few years. The company has gone from losing $90 million on its cash from operations in June 2008 to making $728.53 million from operations as of September 30.
The figures indicate that all the hype about Mel Karmazin turning Sirius around is true. Even though he might be one of the world’s worst public relations men, Karmazin is a genius at selling satellite radio service. Media reports indicate that Sirius is on track to add 1.8 million radio subscriptions in 2012, and Liberty is about to buy it.
John Malone is making a classic Warren Buffett-style acquisition. He is buying a very undervalued company that generates a lot of cash. Sirius’s subscriptions give it a float similar to an insurance company’s. The float is the difference between the subscription payments and the money the company spends on operations. The float is extra cash that the company has to play with because of subscription payments. Buffett was historically a big buyer of companies, such as insurers, that have a lot of float.
Malone has discovered another business that generates a lot of float in Sirius. It’s also a company with a lot of cash. Sirius is the only subscription radio service that makes money.
Pandora Media (NYSE: P) reported on July 31 that it lost $5.22 million in cash from its operations. The company also reported a net income of-$33.18 million on July 31st. Sirius reported a net income of $3.37 billion on September 30. Sirius’s net income was higher than that of Liberty Media, which reported net income of $1.73 billion on September 30th.
Sirius is a good buy for Liberty Media, but John Malone is not Warren Buffett. Media reports indicate that Malone will use a tax dodge called a Reverse Morris Trust to spin Sirius off into an independent company that he will control. Malone appears to be doing this because of the high price that he is paying for Sirius. Liberty has announced that it will pay $2.73 per share for 4,038,700 shares of Sirius. That will give it the 50% it needs to control the company.
The most likely effect of these purchases will be the lowering of Liberty’s share value at least temporarily and a rise in Sirius’s. Both Sirius’ and Liberty’s share value will benefit from this in the long run.
Even with Mel Karmazin’s planned retirement, Sirius is a classic value investment with a low share price and big revenues. The Sirius acquisition proves that John Malone is one smart value investor. It also proves that Liberty Media is worth a look if you are looking for a value buy in the media arena.
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