For most of 2011, industry analysts and automakers themselves have been projecting that 2011 auto sales would come in at about 13 million units sold. Ford Motor Company (NYSE:F) had long stated that they saw the auto sector generating sales between 13 million and 13.5 million units this year. This week Ford lowered those expectations and stated that U.S. auto sales may come in at less than 13 million.
This now begs the question of how this news will impact Sirius XM Satellite Radio (NASDAQ:SIRI)?
One piece of good news is that even if auto sales slip below 13 million, the current subscriber guidance of 1.6 million new subscribers for the year is safe. With auto sales that average 1 million per month, the satellite radio provider can typically announce decent numbers across the board. Having 1 million cars sold per month is great, but for Sirius XM it represents slow growth but a safe quarter.
Another piece of good news is that with perhaps 300,000 fewer cars being sold this year, the company will be spending less in Subscriber Acquisition Costs (SAC). This cost represents the money Sirius XM has to invest in hardware, marketing, and subsidies to auto manufactures to get a satellite radio installed in a car. That should help the EBITDA number in a positive manner.
The bad news is that auto sales coming in below 13 million does not give the street faith that the auto channel is in full recovery mode, and a return to the high sales of yesteryear may take longer than many hope for. The other factor is that at current sales levels, the growth curve for Sirius XM flattens out a bit. Simply stated, while 1 million cars sold a month is a safe number for Sirius XM, it does not allow for any substantial subscriber growth that investors may be looking for.
The bottom line is that until we see a concrete indication that auto sales are in growth mode, the market will be hesitant to jump into equities like SIRI that are tied to the auto sector. Yes, analysts see pent up demand, but that drum has now been beating for 3 months. How much longer can we attribute the slow sales growth to pent up demand?
With Q3 already being a challenge for Sirius XM in terms of hitting a subscriber number close to Q2, news that the pace may be slightly slower could be a small concern. What SIRI investors need to do is seek out any information on where analysts see the 2011 figures finishing up. 12.7 million will not really impact Sirius XM in a big way, but if that number continues to slip down, we may need to begin to adjust our models.
One last nugget of consideration is that Ford is in the midst of contract talks with the UAW and their lowered guidance could be a negotiating tool. Welcome to the world of big business.
Disclosure: I am long SIRI, F.
This article is tagged with: United States
