Don't Buy it, Siriusly

Earlier this year, we had a favorable opinion of Sirius XM Radio Inc. (NASDAQ – SIRI - $1.91). Today we struggle to find a legitimate reason to buy the stock.  Interestingly, investors seem so caught up with the whole Liberty Media (NASDAQ - LMCA) situation that it is possible that potential issues with the core business have gone unnoticed.

While everyone seems laser-focused on the jobs numbers last week, the very disappointing new U.S. auto sales for May 2012 seem to have passed everyone by.  One of the reasons we were high on SIRI earlier in the year was the fact that U.S. auto sales were trending much better than expected.  In fact, the SAAR (Seasonally Adjusted Annual Rate) of car sales, which tends to be adjusted monthly, rose from 14.2M vehicles in January in 2012, to 15.1M vehicles in February, before declining to roughly 14.4M in both March and April.   However, the SAAR for May was a disappointing 13.8M vehicles, which was 4.8% lower than expected and an 8.6% drop from the February high.  Moreover, the poor jobs numbers, lousy stock market, and general economic concerns may weigh on consumers in the near term, negatively impacting car sales.

Clearly, SIRI’s fortunes are tied to auto sales. As a result, much has been written regarding the record 10.8 year average age of the U.S. automobile on the road as a real driver of new car sales, along with the greater availability of financing options, even for those with poor credit histories.  Plus, management has done an admirable job in extending the reach of its target market via its penetration of the pre-owned car sales market with franchised new car dealerships.  Nonetheless, we are cautious regarding its true prospects.

For example, while the number of pre-owned vehicles sold each year is roughly triple that of the new car market, a great many of the buyers of those vehicles are not likely favorable subscriber candidates for Sirius XM.  The average price tag for these vehicles remains in the $8,000+ range and most of these buyers are cost and budget conscious.

Additionally, based upon data we derived from the U.S. Department of Transportation and NIADA (National Independent Automobile Dealers Association) publications, it appears that the majority of pre-owned vehicles are sold by private parties and independent dealers, followed by the franchised and specialty dealerships.  Thus, the actual opportunity may be a challenging one in terms of both total prospects and the conversion rate.  At most new car dealerships, despite the higher profitability, pre-owned vehicle sales still tend to be materially lower in absolute number than new vehicles.

Since 2009, which was the recent bottom for both new auto sales and SIRI’s subscriber rates, car sales rose from 10.55M units sold to 12.8M units sold in 2011, a 21.3% rise.  During the same timeframe, SIRI’s subscriber base rose from 18.8M to 21.9M, a 16.5% increase.  While we do not believe that SIRI is even close to market saturation, anything but a greater than 10% rise in new car sales and material pre-owned car sales conversion/penetration make for a tough market.  Moreover, lower gas prices, while a bonus for consumers, can be a double edged sword here.  Prospective new car buyers may delay trading in their ancient gas guzzlers for new vehicles equipped with SIRI systems, negatively impacting the SAAR.

On top of our auto industry and subscriber conversion concerns, this Liberty Media mess has got to have had an effect on management, which did not need the headache.  Much has been written and speculated on this front so there is no need for a re-hash of the same material.  Suffice it to say Liberty is crushing SIRI. All investors need to know is that since Liberty made its moves and increased its ownership stake by 15%, the stock has declined by nearly 20%.  With no resolution around the corner we can only expect this issue to continue to weigh on the stock.

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