By Nathan Bell
Many investors currently feel sandwiched between accepting low growth on one hand, and having to pay gross prices for high-growth stocks on the other.
Gone, it seems, are the days where you could pay a fair price for a wonderful business – forcing you to accept lower returns by paying up for good businesses or taking uncomfortable risks with lower-quality businesses.
History suggests that value stocks outperform growth stocks nearly 90% of the time (see chart below).
With growth stocks potentially at, or near the end of their second-longest winning streak over value stocks, the case for value stocks is simple.
Value wins out eventually
Source: Franklin Templeton Investments, Eugene Fama & Kenneth French. Templeton Global Research Library
But investing in value stocks doesn’t mean you have to forgo growth. In the current environment, it means digging deeper to find wonderful franchises priced to produce healthy long-term returns, regardless of the macro-economic environment.
Let's analyse one example.
Tune into Liberty SiriusXM
If you’ve hired a car in the US in recent years, it was probably equipped with a satellite radio service called SiriusXM.
For local drivers, a monthly subscription of ~$15 provides access to around 150 channels of ad-free entertainment, including exclusive access to shock-jock Howard Stern, scores of curated music channels to ensure your drive to and from work is as stress free as possible, major sports coverage including the NFL, NBA and MLB, numerous news channels from the world’s most trusted sources, such as the BBC and CNN, and other content that you won’t find anywhere else.
SiriusXM is America’s only satellite radio service, but up until 2009, there were two rival services – Sirius and XM.
Together, they were spending $450m per year on content, and neither was making a profit. As the biggest competitor to this pair is free radio, the regulators approved their merger application and unleashed a financial powerhouse. Revenue and free cash flow have doubled and tripled respectively since the merger.
SiriusXM total subscribers (in millions)
Source: SiriusXM Holdings
Digital music services such as iTunes, Spotify and Pandora have failed to stop SiriusXM’s subscription growth. Regular advertising-supported radio services are the bigger threat, as SiriusXM subscribers are paying for a vast array of entertainment, not just music.
That variety has also minimised the risk to profits of Howard Stern retiring or leaving, which used to be a major issue.
There are four major sources of value that aren’t currently reflected in SiriusXM’s valuation. First is the large increase in potential customers from second hand cars fitted with SiriusXM chipsets. SiriusXM has been working for over a decade to encourage most large automobile manufacturers to fit their cars with SiriusXM devices.
In 2009 (aided slightly by the cash-for-clunkers program, where individuals received a $3,500-$4,500 credit to put toward a new car – usually fitted with a SiriusXM device) new car purchases began a long recovery following the GFC.
With the average new car owned for six or seven years, those new cars are now putting a rocket under the number of used cars currently fitted with a SiriusXM device, expanding SiriusXM’s market from 85m cars currently to 160m by 2025.
Second, better technology and information on the used car buyers means Sirius can better tailor its marketing to this rapidly growing pool of new potential customers.
SXM17 is the company’s new chip set that will finally allow the company to stop broadcasting blindly by using a car's modem to monitor viewership and make it much easier to activate a subscription. For example, you will be able to sign up through your dashboard instead of calling the company.
Third, the long relationships SiriusXM has with auto manufacturers puts the company in the box seat to deliver in-car internet services, whether that’s for traditional vehicles, or the driverless vehicles of the future. It’s impossible to predict whether these services will add materially to the bottom line, but at the current valuation, you’re not paying anything for it.
Lastly, by 2025, SiriusXM will be in a position to merge its separate Sirius and XM signals, and in turn, free up spectrum, which is in increasingly short supply. It could be sold, or used to provide new services, such as those previously mentioned, or perhaps a cheaper advertising-based offering to sign up customers initially unwilling to pay $15 per month.
Like in-car internet services, we’re not factoring this in to our valuation and consider it a free option.
Why own Liberty SiriusXM?
There’s one last twist in the story. While SiriusXM is listed in the US, we own Liberty SiriusXM, whose chief asset is its 65% shareholding in SiriusXM, as it trades at a ~15% discount to SiriusXM.
As SiriusXM continues to buy back shares at a rapid clip (it has shrunk the share count by 23% over the past three years), Liberty SiriusXM’s stake in SiriusXM keeps increasing.
SiriusXM currently trades on an attractive price-to-free cash flow multiple of 16, which isn’t lost on Liberty SiriusXM.
The company failed in its attempt to acquire the shares it doesn’t own in SiriusXM in 2014, offering $3.68 per share compared to the current price of $4.17. Eventually, we expect a deal will get done and Liberty SiriusXM’s discount will disappear.
In a market where high-growth companies are trading at nosebleed valuations, this example shows that there are still growth businesses trading at value prices.
With Australia only representing a small portion of the global share markets (about 3%), you may have to look overseas to uncover opportunities like Liberty SiriusXM.
Disclosure: At the time of writing, Peters MacGregor Capital Management Limited holds a financial interest in Liberty Sirius XM Group.
This is a sponsored article by Peters MacGregor Capital Management.
Peters MacGregor Capital Management Limited do not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Any information, material or commentary by Peters MacGregor Capital Management Limited is intended to provide general information only. Please be aware investing involves the risk of capital loss. Before acting on any advice, any person using the advice should consider its appropriateness having regard to their own or their clients’ objectives, financial situation and needs. You should obtain a Product Disclosure Statement relating to the product and consider the statement before making any decision or recommendation about whether to acquire the product. Past performance is not a reliable indicator of future performance.
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