According to estimates compiled by IBT, International Business Times, the major automobile analysts are all in agreement: April new car sales will beat last year's sales by 9% or more when the numbers are released on Wednesday. And if the trend continues, the industry is headed for the best six months of new car sales since the "Great Recession". According to TrueCar analyst Jesse Toprak "at some point in 2014, it's very reasonable to think we would begin seeing 16 million SAAR." This is great news for the auto industry, and for companies like Sirius XM Radio (NASDAQ:SIRI), which sells its satellite subscription service to those new car buyers. All of the "Sirius-friendly" OEMs are expected to be up significantly over last year:
J.D. Power and Associates expect retail auto sales -- which excludes government procurements and company fleet purchases -- to be up 9% from April of last year. Edmunds.com predicts that total April sales, including fleet and government purchases, will rise 10.4% compared with last year, while Kelley Blue Book predicts a more bullish year-over-year-jump in April, to 11.4%. TrueCar.com, meanwhile, anticipates a 10.7% rise.
There are a few analysts covering Sirius that think that this is a negative, and the company is too dependent on new car sales. That is like saying it is dependent on its satellites for the service. Of course it is. That doesn't mean it is a bad thing. Tire companies would not survive without cars either. So should investors stay away from them?
The good news is that this trend should continue for quite some time. Right now the financing is easy, which is fueling more purchases. But the major driver of this trend is the increasing age of the vehicles on the road right now. The average car is more than 11 years old. This forces many people to buy new cars out of pure necessity as their vehicles literally wear out. The average vehicle age has been increasing quickly over the past five years:
The average age of cars and light trucks currently in operation in the U.S. has increased to 10.8 years, according to Polk, a leading global automotive market intelligence firm. Passenger cars showed a modest increase in age since 2010, from 11 years to just 11.1 years at the end of June 2011 (see table A). Light trucks (including pickups and SUVs) show a more sizeable gain in the same timeframe, from 10.1 years to 10.4 years. Overall, average vehicle age has been increasing quickly over the past five years. Polk reports average age based on an analysis of national vehicle registration data.
On Tuesday morning, Sirius Management will hold a conference call to discuss earnings for Q1. Most analysts predict the additional subs from the additional new car sales will bring a 50% increase in earnings, and a jump in revenue of over $100 million:
|Earnings Est||Current Qtr.|
|No. of Analysts||12.00||12.00||13.00||13.00|
|Year Ago EPS||0.02||0.48||0.51||0.10|
|Revenue Est||Current Qtr.|
|No. of Analysts||11||11||14||14|
|Year Ago Sales||804.72M||837.54M||3.40B||3.80B|
|Sales Growth (year/est)||12.60%||11.80%||11.70%||9.50%|
This is really good news for Sirius XM shareholders. But what is said during the call will determine which way the stock moves. That is because Sirius Management has some explaining to do. The biggest thing on the minds of the Perma Bulls is the $2 billion stock buyback. How many shares have been purchased so far? A solid reduction in shares could send the stock soaring, however, if the company has not taken action yet, many investors may unload shares as the calendar page flips over to "Sell in May". The company has been "promising" this buyback for a long time now. I have written numerous articles about it since 2011 when it seemed like it might never really happen.
Another thing that the "Sirius Team" needs to address is the new General Motors (NYSE:GM) contract that will be implemented this fall. Because of a "geography issue", there will be a "distortion" in the way net sub additions are calculated which caused the 2013 guidance to be lower. Although most analysts understand the reasons for this, others continue to write articles which take the position that Sirius subs are not growing due to 2013 net sub addition guidance of 1.4 million; much lower than the actual net additions of 2 million in 2012. Here is an example:
Last year the company added over 2 million net subscribers, growing its overall subscriber base to 23.9 million [Sirius XM's SEC Filings]. Although we expect the subscriber additions in Q1 to remain healthy, they may not exhibit significant growth as the company seems to be conservative about its guidance for 2013, and expects to add 1.4 million net subscribers during the year.
And then there was this from Zacks a few weeks ago:
We downgrade our recommendation on SIRIUS XM Radio Inc. to Underperform. Why the Downgrade? SIRIUS XM forecasted that its growth rate of net subscriber addition will be reduced in 2013. The company added more than 1.66 million Self-Pay subscribers in 2012. However, it is not expected to add more than 1.6 million Self-Pay subscribers in 2013. Similarly, SIRIUS XM generated more than 2 million net new subscribers in 2012, whereas the company is likely to add a mere 1.4 million net new subscribers in 2013.
Without additional research, it appears like the above analysts have identified a serious growth problem at the company. I wrote about it in January:
One "big OEM" is switching from paid to unpaid trials in Q4 2013. This means that the subscriptions will not be counted until they are converted to self pay by the consumers after the 3 month trial. In the past they would have been counted when the cars were in production. According to Sirius CFO David Frear it is "just a geography issue". The opportunity is the same, with the same conversion rate; but it does cause a "distortion in net subscriptions". However he thinks that most analysts understand this.
Prices of Sirius XM shares:
|Apr 5, 2013||2.96||3.02||2.95||3.01||33,983,900||3.01|
|Apr 4, 2013||3.06||3.07||2.97||3.00||61,832,600||3.00|
|Apr 3, 2013||3.07||3.08||3.05||3.07||48,459,700||3.07|
|Apr 2, 2013||3.08||3.09||3.07||3.08||31,759,400||3.08|
|Apr 1, 2013||3.08||3.09||3.06||3.08||24,128,000||3.08|
Obviously a lot of analysts/writers and Sirius investors do not understand this. After the Zacks downgrade to $2.75 was published on April 3, the shares fell from a high of $3.09 the day before, to a low of $2.95 on April 5. For the long-term investor, these negative articles can be used as great buying opportunities. But if it is not addressed by Sirius on Tuesday, the misinformation will continue, and the stock could remain stagnant. Especially if there is not significant news about the share buyback.
In all fairness to Zacks, the company upgraded Sirius on April 18 with a new target of $3.25, but the damage from the first downgrade has already been done. The analysts there are also worried about how dependent Sirius is on the car industry. They believe that auto sales will slow down in 2013:
SIRIUS XM is largely dependent on the growth of the U.S. auto industry and currently holds an estimated 70% market share of the new cars sold in the face of growing competition from Pandora Media (NYSE:P) and Spotify. Therefore, even a minor fluctuation of auto sales may significantly affect the company's overall financials. Continuous rise in auto sales led to a record subscriber growth for the company in 2012. Management has hinted that auto sales may rise at a slower rate in 2013. In order to retain its subscriber base, SIRIUS XM recently introduced an innovative personalized interactive Internet radio service called "MySXM". Additionally, the company is expected to maintain its churn rate going forward.
So should you buy, sell or run away? In my opinion, Sirius is a buy right now for the long run. When the buyback is complete, the shares should shoot past $3.65. But under these circumstances, if investors do not understand how the GM deal will work, the shares could remain flat until they do. So if you are impatient, and have weak hands, sell and run away.