Auto sales in May showed a rebound from April and the news bodes well for satellite radio provider Sirius XM (NASDAQ:SIRI). The company is sensitive to what happens in auto sales, as it derives most of its subscribers from that sector. Consumers buying new cars are often exposed to Sirius XM via a promotional trial. Satellite radio is factory installed in about 67% of all new cars sold.
In April the pace for auto sales slowed slightly giving a small cause for concern that the auto sector was perhaps losing some steam. The SAAR dipped below 15 million for the first time in 6 months and while no one was running for the exits, sector watchers were eager to see if April was an anomaly or if it was the beginning of a new trend. With May delivering a robust number it appears that April was simply a matter of the tax man exacting his 2 cents rather than consumers getting gun shy. The biggest factors in the auto sector growth seem to be pent up demand, easier financing, and automakers' incentives.
For May the auto sales pace appears to be back on track. It is anticipated that the sales tally for the month will be in the neighborhood of 1.4 million units, well above the 1.1 million level that allows Sirius XM to report good metrics.
It is anticipated that for the full year, new car sales can approach 15.5 million units. Sirius XM delivered over 2 million net subscriber additions in 2012 on new car sales of 14.5 million. For 2013 the guidance is 1.4 million net additions on a new car sales market of an anticipated 15 million.
At first blush it would appear that Sirius XM would have little trouble attaining the 1.4 million net addition mark. The wrench in the works is that the company has renegotiated the GM deal. GM has been the biggest contributor to satellite radio installations as well as subscribers. Beginning in Q4 of this year the promotional subscriptions from GM will no longer be counted as subscribers upon the sale of a car. Instead, the company will only count subscribers that elect to continue with Sirius XM after the promotional period ends.
With 5 months of auto sales in the books now, Sirius XM appears to be pacing well. The company added 450,000 subscribers in the first quarter with sales that were pacing below what we are seeing in the second quarter. In addition, the company's used car initiative is ramping up.
While there is still a long way to go in 2013, thus far, satellite radio investors should be happy about the new car sales channel. There is actually already enough sales pace in Q2 for the company to deliver a good number. It would literally take the wheels falling off of the proverbial truck in June to foresee anything negative that will impact the company numbers for the quarter. With great auto sales and a share buy-back program in mid swing, the valuation of Sirius XM is looking good.
Disclosure: I am long SIRI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.