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The auto sector is something that Sirius XM (NASDAQ:SIRI) investors have learned to monitor. If auto sales are tracking well then satellite radio providers can usually post a pretty good quarter. In January we saw auto sales up over 1 million units and it set the stage for a possible good beginning to 2013. January 2013 saw a nearly 15% improvement over January of the year prior. Early indications in February seem to be that auto sales will remain at a decent clip, but will not match the 15% year over year improvement delivered in January. The reality is that analysts are expecting about a 5% improvement overall this year when compared to last.

In 2012 February saw auto sales come in at 1.151 million. With February of 2013 half way gone, sector tracker Edmunds is estimating that February 2013 will see slightly higher at about 1.189 million. This would represent sales of about 38,000 more units year over year, or a gain of about 3.5% from last year. Should these numbers hold true the rise so far this year at 7.4% would be in the neighborhood and slightly ahead of analyst expectations (5% growth YOY).

This bodes well for Sirius XM on a few fronts. While 15% growth from 2012 would seem good, it would have caused some angst on the cost side of the satellite radio business. Sirius XM has to buy chip-sets and in many cases assist with the cost of the installation. The company uses auto projections to determine its own supply chain. If sales figures were to remain 15% above projections as we saw in January the company would have to outlay more cash than perhaps anticipated. With overall sales now within a comfortable margin as it relates to expectations, the company plans on the cost side do not have to shift very much.

The positive growth in sales should also help GM, Ford (NYSE:F), and Chrysler thin out inventory levels which had gotten as high as 90 days in November of 2012 when the industry seems to be trying its best to stay at about 60 days. Vehicle inventory levels can also impact Sirius XM in a few ways.

First, the longer a car sits on the docks waiting to be sold, the longer it takes Sirius XM to recoup any money invested into the radio. The second reason is specific to Ford and Chrysler, which buy promotional subscriptions at the time of production. Money paid by Ford and Chrysler sits in deferred revenue, a liability on the balance sheet. The longer money sits in deferred revenue the longer the company is waiting to actually book the dollars to revenue. That process can not begin until the car is sold to a consumer. The third reason is that such cars are a drain on ARPU. Last year the "big three" ramped up production leading into the election and saw inventory swell. When Sirius XM delivered its Q4 results earlier this month we actually saw ARPU dip from $12.14 in Q3 to $12.12 in Q4. Part of that is attributable to vehicle inventory sitting on the docks.

What we want to see for a Sirius XM perspective is manageable growth from the auto sector. That appears to be what we are now getting. Ford and Chrysler are now down in the 80s on inventory days, while GM is at 95. While it still seems high, the industry needs to be prepared for March, which is a big month and should see auto sales approach 1.5 million.

Looking forward to March, and trying to get a jump on what Q1 will deliver for Sirius XM, we can anticipate Q1 auto sales in the neighborhood of 3.73 million compared to 3.47 million last year. In real numbers that is a pick up of about 260,000 vehicles, 180,000 of which would be satellite radio equipped. These numbers are quite manageable by Sirius XM on the cost side and should allow the company to keep from reporting a negative surprise in SAC like it did in Q4. That being said, the company deal with Toyota (NYSE:TM) is expanding, so there will be costs to consider on that front.

Why focus on the costs? The answer is simple. We are all well aware that more auto sales bodes well in the longer term. What we want to avoid is being surprised in the shorter term. Every time a satellite radio is installed it is, in theory, good for the long term prospects of the company. Essentially, the company invests a lump sum today to derive longer term benefits over time. Watching auto sales, production, and inventory allows investors to gauge the entire picture.

One key for February is the success of the Presidents Day sales. This is a big month (mid February to mid March) for auto sales. It will be interesting to see what the second half of February delivers.

Source: Early February Auto Sales Numbers Bode Well For Sirius XM