It happens nearly every year. January auto sales get reported, and investors in anything related to the auto industry mull over whether the year will be good or bad. Sirius XM (SIRI) investors are particularly sensitive to auto sales and production because it is through new car production and sales that the company generates the bulk of their subscribers.
As things stand right now, the SAAR (Seasonally Adjusted Annualized Rate) for January is expected to be at about 11.6 million. This is down substantially from a SAAR of about 13.7 million we saw just last month. Analysts still expect auto sales to approach 14 million in 2012, but as with any year things tend to start off slowly. It would appear that 2012 will follow the same course.
One of the main reasons that Sirius XM investors do not have to worry about a slow start to new car sales in January is that there is a new and emerging market for the company to garner subscribers. Sirius XM has deals in place with GM, Nissan (NSANY.PK), and Auto Nation (AN) that provide a three month trial to buyers of used cars (regardless of brand). These deals happened to be a significant contributor to the Q4 sub numbers, and a factor that allowed the company to deliver nearly 90,000 more subscribers than needed to beat their 2011 guidance. The company even attributed the success of the subscriber number in part to a "significant contribution from the used car channel".
The first key to remember is that these trial subscriptions are not counted as subscribers right away. They are only counted after the trial period, and if the consumer elects to keep the service. Thus, it is used cars that were sold by some 2,500 participating dealerships in October, November, and December that will make up the used car contribution in Q1 of 2011.
Exactly how big is the used car market? Well Q4 of 2011 can provide some hints. Prior to Q4 Sirius XM's biggest subscriber quarter was Q2 when the company reported some 445,000 subscribers. In Q4 production was lower than Q2 by Sirius XM's biggest production partners that deliver subscribers when a vehicle is built. Next, the point-of-sale (delivers subscribers when a car is sold) category was also down from Q2. Lastly, the trailing category, which delivers subs after a trial and if the consumer elects to keep the service, was also down from Q1 (which delivers these subs in Q2) to Q3 (which delivers subscribers in Q4. Thus, all metrics were lower than in Q2 but the company reported subscribers at a rate 90,000 higher. How did this happen?
The answer is that it came about from a ramp up in retention efforts and from these used car deals. The GM deal was announced in July with 1,000 participating dealers. That number quickly rose to 2,000 dealers by the time the company announced a similar deal with Nissan. Because these used cars only have potential of becoming subscribers after a three month trial, the impact would be felt in Q4. The driver in Q4 was not new car sales, nor new car production. It was the combination of retention efforts and used car sales.
It is this new used car channel that will be the game changer for Sirius XM in 2012. Coupled with a healthy 10% rise in expected 2012 auto sales, and we have a recipe for some great success in the subscriber metric for 2012.
New car sales will be slow in January, but as a Sirius XM investor that is fine. The company now has a new and significant supply. In addition, given the success of the GM, Nissan, and recently announced Auto Nation programs, I anticipate a few major announcements from the company regarding other OEMs. In fact, I feel strongly that we will see one such announcement prior to the quarterly call.
The bottom line is that Sirius XM is poised to bring home the bacon even with a slow start in January.
Disclosure: I am long SIRI.
