If you are invested in Sirius XM (SIRI) it is almost imperative that you keep tabs on the auto sector, for it is new car sales and production that supply most of Sirius XM's subscriber growth story. This year will present a change in July that will benefit the company and should serve to quell the Q3 subscriber doldrums that typically impacts the company in the subscriber number. This key factor, which I will reveal a bit later, could give a dynamic reason why Sirius XM can blow away its current 2012 subscriber guidance of 1.6 million net additions.
Sirius XM actually garners subscribers in three distinct ways from the auto channel. I term these three categories as "Leading", "Point-of-Sale", and "Trailing". Which category a particular manufacturer falls into is determined by when or if the company receives payment for a promotional subscription.
In the "Leading" category we have manufacturers such as Ford (F), Chrysler, Mercedes Benz, and BMW. These companies all pay Sirius XM for a promotional subscription at the time a vehicle is produced. Because Sirius XM receives a payment, these satellite radio equipped cars are counted in the subscriber numbers reported by the company. Essentially this means that it is production and not sales that is the key metric. About 38% of the new car market fits into the "Leading Category.
The "Point-of-Sale" category includes vehicle partners such as GM and Honda (HMC). These companies pay Sirius XM for a promotional subscription when a new car is sold. This means that the company counts the promotional subscription when a consumer actually buys the car. In this category it is sales that drive the subscriber line. About 32% of the new car market is made up by the "Point-of-Sale" category.
The "Trailing" category provides promotional subscriptions that are not counted in the subscriber roles of Sirius XM. These promotional subscribers are not counted because these companies do not pay Sirius XM for the promotional subscription. A subscriber is only counted if, after the promotional period, the consumer elects to keep the satellite radio service and become self-paying. Between 40% and 45% of promotional subscribers convert to self-paying status. Thus it is typically three or four months down the road that Sirius XM realizes subscriptions from vehicles in this category. Here it is past sales that matter. This category includes manufactures such as Toyota, Nissan, Hyundai, and Kia. The "Trailing" category makes up about 30% of the market.
With the stage being set, it is now time to expose the great July surprise promised earlier.
Typically the month of July brings with it scheduled auto plant closures for what has been termed a "summer" break. These plant closures can last a couple of weeks, and they afford the manufacturer time to upgrade and re-tool assembly lines. This year is different though. For starters auto companies are not carrying excessive inventories anymore. This means that they no longer have a big supply chain to feed the market while these shut-downs happen. Secondly, due to a strong rebound in auto sales, manufacturers are in need to keep vehicles rolling off of assembly lines.
For Sirius XM this means that the all important "Leading" category will actually supply many more vehicles in Q3 than is typical. With a minimal break in production, there will by extension be a minimal break in satellite radio equipped cars that are counted as subscribers in the quarter.
Ford announced that the typical two week shut-down at 6 assembly plants and 7 engine and parts plants will be trimmed to just one week, adding 40,000 units to the production numbers that typically would not exist. Consider about a 70% installation rate (actually a conservative number) at Ford and that equates to an additional 28,000 satellite radio subscriptions.
Chrysler, which has been gaining steam, has announced that it will eliminate the two week summer shut down at 4 plants and trim the shut down to just 1 week at several others. Once again, this will supply additional subscribers in the "Leading" category that typically would not exist in Sirius XM's Q3.
In the "Point-of-Sale" Category GM has announced that it will avoid the shut down altogether at 9 of its 11 plants in order to keep the supply chain in tact and meet anticipated demand for the balance of 2012.
The trend is not just amongst the Detroit manufacturers. Plant shut-downs have been trimmed by many automakers. What this means for Sirius XM is that a Q3 that in the past seemed to deliver more modest subscriber numbers when compared to other quarters will likely be able to report a substantial subscriber surprise this year. Couple that with what was already anticipated to carry a nice year over year gain, and we could actually see stellar comparisons when the company reports Q3 numbers.
As of right now Sirius XM has set 2012 subscriber guidance at what I term as a modest 1.6 million additions. Through the second quarter the company was already over the 1 million mark, essentially meaning that they need less than 600,000 net additions to meet guidance. While 2 million net subscriber additions is not yet a "take it to the bank" proposition, there is little reason to not think the company can approach that number. Adding more fuel to the subscriber positives is the company's used car program which is exposing the secondary market to promotional subscriptions (in the "Trailing" category) and you have a recipe for Sirius XM blowing away numbers in a way we have not recently seen with his company.
Sirius XM will be reporting its Q2 numbers on August 7th. The company pre-announced an impressive 622,000 subscriber additions and raised guidance on subscribers to 1.6 million and revenue to $3.4 billion. All indications are that the Q2 numbers will be a home run. Combine good fundamentals with strong technical indicators and we can see a substantial pre-conference call run up as well as continued strength in Q3. A run to $2.25 and higher is not out of the question. There is little resistance above $2.10.
Disclosure: I am long SIRI.