U.S. auto sales for March could reach as high as 1.47 million according to auto sector analyst Jeremy Anwyl of Edmunds. This would bring the total quarterly sales close to 3.7 million, which implies a growth of little under 7% over the first quarter of 2012 [1 Million Sirius XM Equipped Cars To Hit The Road In March, SeekingAlpha].
This bodes well for satellite radio service provider Sirius XM (NASDAQ:SIRI) which added over 2 million net subscribers and grew its revenues by close to 13% in 2012 [Sirius XM’s SEC filings]. The growth in U.S. vehicles sales, an improvement in subscriber retention, a sustained new vehicle conversion rate and a push into the used-car segment are driving subscriber additions for Sirius XM.
Past Performance In Auto Segment
Sirius XM’s growth has primarily come from automotive subscribers, and this largely depends on the broader trend in vehicle sales in the U.S. The automotive market growth is being helped by higher availability of financing and lease deals. The overall auto sales in the U.S. stood at around 14.5 million in 2012 and is expected to cross 15 million in 2012 [U.S. Auto Sales Seen Exceeding 15 Million for Full-Year 2013, The Wall Street Journal, Jan 2 2012].
While growth in the automotive market has helped, Sirius XM has also done well because of its sustained new vehicle conversion rate. This figure stood at around 44% for the fourth quarter and is likely to remain within 44-46% range for the next few years. The new car penetration rate (the number of new vehicles equipped with satellite radio) remains at around 67-68%. As the new vehicles slowly enter the used-car market, Sirius XM will have a greater opportunity to grab subscribers. The company added more than 1 million gross subscribers from the used-car channel and expects to increase this figure to 1.5 million in 2013.
The company has been able to strike deals with a host of auto manufacturers, and as a result, close to 50 million vehicles in the U.S. are currently equipped with satellite radios. Management expects this figure to double over the next five years. If this results in an increase in Sirius XM’s subscriber base by at least 1.5 times over the next five years, there could be more than 10% upside to our price estimate. While doubling the user base might not be possible as competition from Pandora (NYSE:P) and others are rising, Sirius XM is making some serious efforts to branch out to the Internet medium and promote its online streaming app. This will help it broaden its subscriber base and defend against Internet-based competitors that are expanding into in-vehicle systems. With its new service called MySXM, Sirius XM intends to give its subscribers a personalized radio experience, similar to Pandora’s.
Our price estimate for Sirius XM stands $2.34, implying a discount of about 30% to the market price.
Disclosure: No positions