OEM Sales Can Translate to Better Cash Flow for Satellite Radio 14 comments
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Automobile sales are down. We all know it, and we have all seen the news. What many people do is translate that impact directly to satellite radio. In many ways, this is a mistake because SDARS' installations are ramping up at a rate faster than the 12% sales drop in car sales. We covered this in our piece titled “July 2008 Auto Sales,” where we outline the sales of autos and estimate satellite radio installations.
Looking beyond the raw sales numbers, we need to look at the dynamics of what has been transpiring in the automotive world. The “Big Three” U.S. auto manufacturers are losing market share. It just so happens that these also happen to be the OEMs with the sweetest satellite radio deals. These OEMs, it is estimated by many, have the best installation subsidy deals as well as the best revenue share deals. Thus, these are the most expensive installations and subscribers, from a business standpoint, for satellite radio.
Car sales will return to normal levels at some point, but the mix by brand has shifted. Toyota (TM), Nissan (NSANY), Hyundai (HYMLF.PK), Kia, Subaru (SBUOF.PK), Volkswagen (VLKAY.PK), Audi, and Honda (HMC) are all gaining share, while GM (GM), Ford (F), and Chrysler are losing share.
Going forward, this means that more subscribers from the less expensive deals will be getting added into the mix. This will improve the SAC line item, the CPGA line item, as well as the revenue share line item. These are all metrics that involve costs to the company. Improvement in costs will help cash flow, and media companies operate on cash flow. By example, if the revenue share mix changes by 5% on $2 billion in OEM revenue in the future, it translates to $100 million more to the bottom line. Looking at growth over time, over $1 billion more could be added to the DCF value, and hopefully market cap. The beauty is that these savings are not “synergy based”, but instead a function of SDARS being able to drive better structured deals with OEM partners over the years. It will take time to see the shift, but it will happen.
It is generally accepted that the GM deal is the most expensive in the sector. It is also generally accepted that other deals are less expensive. What many do not yet recognize is those less expensive OEMs are the very manufacturers that are responsible for a large percentage of the ramp-up in satellite radio installations in the OEM channel.
At some point OEM sales will improve. When that happens, the market share will likely differ from that which we see even today. The “Big Three” have had a heavy reliance on truck and SUV sales. These types of vehicles are not selling well, and that impact will continue to shift the share away from GM, Ford, and Chrysler. Just look at the OEM market share of 1 year ago as compared to today (see chart), and we can already see the shift happening. For SDARS it means more of the less expensive installations are getting to consumers. This means better metrics at the quarterly calls, and helps translate to a better cash flow.
The shift is not dramatic yet, but it is happening nonetheless, and investors in the sector will want to be ahead of the curve in seeing the transformation. Sirius XM Radio trades at about $1.50 right now. There are promises of $400,000,000 in merger synergies, but as yet nothing concrete to look at. The merger synergies are great, and seeing improvement in the business model without considering the merger is a positive aspect of the scaling that is happening in satellite radio.
Position: Long Sirius XM. No Position OEM Sector.
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This article has 14 comments:
It is an opportunity of a lifetime, and do not put money you cannot afford to lose in because all stocks including this one are speculative.
great analysis - it would be interesting to drill down in the numbers and see what growth rates for the relevant models w/in each manufacturer. This would enable us more easily project forward future oem add-on subscribers.
I also think sirius xm should work towards providing a promotional free period for dealer sold used cars (perhaps 3 mo free or something). Being that the install cost is already built into these used cars, this is a huge untapped resource that could significantly improve market penetration and subscriber acquisition costs for quarters going forward.