As any Sirius XM (SIRI) investor knows auto sales are the driving force behind the subscriptions that bring revenue into the company, which in turn, contribute to Free Cash Flow (FCF) and EBITDA growth. As a media company, it is Sirius XM's FCF and EBITDA appreciation that determine value.
The good news is that auto sales seem to be on a pace for October that will match September, or at least be very close. This is traditionally the case, but getting continued good auto sales news should allow the Street to anticipate that the company will beat its current guidance of 1.8 million net subscriber additions for the year.
Through three quarters, Sirius XM is at about 1.5 million net subscriber additions. This would imply that the company only needs about 350,000 subscriber additions in Q4 2012 to meet guidance. If you have been invested in Sirius XM for any length of time, you are likely aware that management typically under-promises and over-delivers.
At about the halfway point in October, auto sales are pacing to deliver between 1,150,000 and 1,200,000 for the month. Last month, the total was 1,185,000. The projected SAAR for October is 15 million.
One particular reason that a healthy pace on new cars is important is because for every new car sold, there are about four used cars that get new owners. Sirius XM has been really pushing the used car channel, and with some 6,500 participating dealers, the numbers can begin to add up quickly.
If October continues on its current pace, we can anticipate that Q4 should be able to deliver enough new car sales to have the sector sell 14.5 million in the U.S. in 2012. That would imply at least 3.6 million for a Q4 total. All things considered, Sirius XM should be on a pace to add about 2 million subscribers for the year -- a good 200,000 above current guidance.
With the election around the corner, it will be very interesting to see what transpires in terms of car sales. In my opinion, even if a speed bump is hit, Sirius XM should be quite safe with its 1.8 million guidance.
It is getting safer and safer to almost assume 2 million net subscriber additions for 2012. The next big catalysts will be 2013 guidance, the status of Mel Karmazin as CEO, and a much-anticipated share buyback.
Understanding October sales now is important for investors because the auto sales news for the month is scheduled to hit the wires just two days after Sirius XM reports its Q3 2012 numbers. There is a distinct potential that positive auto sector news can add proverbial fuel to a run that I am anticipating after the Q3 call. It appears that the situation is lining up nicely. If you see a run, what better time to jump in than on a dip prior to it?
Disclosure: I am long SIRI.