The most anticipated reverse stock split of the year is a reality — and this company is a bargain

Since 2024, the hype surrounding the artificial intelligence (AI) revolution has played a major role in pushing Wall Street’s three major stock indexes to multiple record highs. But AI isn’t the only trend driving the broader market higher. The euphoria surrounding stock splits has played an equally significant role.

A stock split allows publicly traded companies to adjust their share price and number of outstanding shares by the same factor, without changing their market capitalization or underlying operating performance. It is a purely cosmetic maneuver that can have important consequences.

There are two types of stock splits, with investors preferring one over the other. A reverse stock split is designed to increase a company’s nominal share price, usually with the goal of ensuring that it meets the minimum standards for continued listing on a major stock exchange. A forward stock split, on the other hand, is designed to reduce a company’s share price to make it nominally more affordable for ordinary investors who cannot purchase fractional shares through their broker.

Typically, reverse splits are done by struggling companies whose stock price is faltering. In comparison, companies that do forward splits tend to be more innovative and better at executing than their competitors. It is therefore not surprising that most investors focus on high-flying companies that do forward splits.

Since late January, 13 leading companies have announced or completed a stock split, 12 of which are of the “forward split” type, including AI darlings Nvidia, BroadcomAnd Supermicrocomputer.

But it’s one notable reverse stock split that’s worthy of Wall Street and investors’ attention today.

The long-awaited 2024 reverse stock split is now complete

Mid December, Sirius XM Holdings (NASDAQ: SIRI) and Liberty Media’s Sirius XM tracking stock, Liberty Sirius XM Group (NASDAQ: LSXMA)(NASDAQ: LSXMB)(NASDAQ: LSXMK)announced their intention to merge into a single class of stock. Liberty Media is the majority owner of Sirius XM, and the variation in price between Liberty Sirius XM Group’s three classes of stock and the share price for Sirius XM stock has been at times bewildering.

Last week, the final exchange ratio for this merger was announced, with Liberty Sirius XM Group shareholders exchanging their shares “in exchange for 0.8375 of a share of New Sirius common stock.” Liberty Sirius XM Group ceased trading after hours yesterday, September 9, meaning that today, September 10, marks the first day of a single, non-confusing class of Sirius XM stock.

But there is more to this combination than just getting the exchange rate right and resolving the confusion surrounding different share classes.

In mid-June, Sirius XM announced that it would conduct a 1-for-10 reverse stock split following the completion of its merger with Liberty Sirius XM Group. The reverse split, which has now been completed, reduced the company’s outstanding shares from just over 3 billion to an estimated 339.1 million shares.

What makes this reverse stock split unique is that it wasn’t done out of weakness. In other words, Sirius XM wasn’t in danger of being delisted. Nasdaq stock exchange.

Instead, the decision was made to raise the stock price from the $3 to $6 range it has hovered around for years to one more likely to attract institutional investors. Some money managers avoid stocks priced below $5 for fear of increased volatility. Sirius XM’s 1-for-10 reverse split eliminates that minor concern and should put the company back on the radar of top-tier money managers.

Sirius XM is a screaming bargain for opportunistic long-term investors

Sirius XM Holdings is not only the only notable reverse stock split on Wall Street in 2024, but also likely the best buy among the 13 companies that have announced or completed a split this year.

I’ll get into the numbers that make Sirius XM a “worth buying” stock in a moment, but let me point out some of the competitive advantages that mean you can own the stock with confidence for years to come.

For starters, it is the only licensed satellite radio operator. While this does not mean that there is no competition, it does indicate that Sirius XM is a legal monopoly. As such, it gives the company exceptional pricing power with its monthly and annual subscriptions.

Another advantage of Sirius XM’s operating model is its cost structure. While some expenses, such as royalties and talent acquisition, will fluctuate from quarter to quarter, transmission and equipment costs typically don’t change regardless of the company’s subscriber base. If Sirius XM can grow its subscriber base, it should have a clear path to improving its operating margin over time, thanks in large part to the fact that some of its costs are highly transparent and predictable.

A third competitive advantage Sirius XM has over traditional radio operators is its revenue generation path. Online and terrestrial radio providers rely overwhelmingly on advertising to pay their bills. While this strategy works well during long periods of economic expansion, it can raise major questions when recessions inevitably occur.

Sirius XM generated less than 20% of its revenue in its first six months from advertising. By comparison, nearly 77% of its revenue can be traced to subscriptions. Satellite radio subscribers are significantly less likely to cancel their service during a recession than they are to cut advertising spending. This generally results in more predictable cash flow for Sirius XM in any economic climate.

With these competitive advantages in mind, I now want to turn to just how historically cheap Sirius XM stock is. Based on where the stock closed on September 6, Sirius XM could be purchased by opportunistic long-term investors for 8.3 times next year’s earnings. This represents a 53% discount to the average forward price-earnings (P/E) ratio over the past five years, and is a stone’s throw away from the lowest forward P/E ratio since the company went public in September 1994.

Sirius XM has also historically been cheap relative to its cash flow generation. Its 5.6x current-year (2024) forecast operating cash flow multiple represents a 43% discount to the average price-to-cash-flow multiple over the past five years.

Add to that a sustainable yield of 3.9% and you have a bargain on your hands. It is also the most anticipated reverse stock split on Wall Street in 2024.

Should You Invest $1,000 in Sirius XM Now?

Before you buy Sirius XM stock, here are some things to consider:

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Sean Williams has positions in Sirius XM. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Broadcom and Nasdaq. The Motley Fool has a disclosure policy.

The most anticipated reverse stock split of the year is happening — and this company is a bargain was originally published by The Motley Fool