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Four Factors Likely to Fuel Auto Sales

by: Tyler Savery August 19, 2008 | about stocks: GM / SIRI    

Tyler Savery

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Growth in satellite radio is coming from the OEM channel. This has been the case for quite some time, and despite having more installations than ever before, the fact that car sales are down weighs on the investor's psyche. The perception is that poor auto sales result in bad times for SDARS.

One silver lining in this whole situation is that there will be a slingshot effect at some point in the future, and satellite radio will benefit from it. Think about it this way. People are watching expenses a bit more than they were a year ago. People are stretching another year or two out of their cars. They can not stretch it forever though. At some point, they will be new car buyers again. It is only natural that a lull in sales will be followed by a boost in sales.

Perhaps the best example of this happened in 2005. GM (GM) offered an “Employee Discount” promotion in the second and third quarter. The promotion was very popular, and GM car sales boomed. At the time I made the statement that the good times in Q2 and Q3 of 2005 would be followed by lean times in Q4 2005 and Q12006. Some felt I was crazy, but in the end the numbers illustrated that I was correct in my thinking. My thoughts were that the sales promotion brought people into car dealerships earlier than they might have otherwise come, and because they came early, it would draw away from sales later in the year. That is exactly what happened.

Auto sales are off by about 12% from last year. The same type of dynamic that GM went through in 2005 will happen again, with slumping sales now turning into positive sales at a point in the future. At some point there will be a swing back towards positive territory, and in my opinion this swing will be fueled by four factors:

  1. Automakers making more fuel efficient cars at a price point and with options that consumers want.
  2. Steep discounts on the remaining big vehicles such as SUVs and trucks, fueled by gas getting to more reasonable levels.
  3. Consumers being between a rock and a hard place and wanting to trade in before too many miles get onto the cars they decided to hold onto for longer than they otherwise would have.
  4. The economy stabilizing and consumers gaining confidence.

We have seen the 12% decline in auto sales in 2008. Meanwhile, satellite radio installations continue to move upwards. Currently there are estimates that 50% of automobile production gets satellite radio. Consider 15,000,000 as the average year for car sales. That would put 2008 auto sales on a pace for 13,200,000. Fifty percent installation would put the number of satellite radio equipped cars at 6,600,000.

Now if we look at things returning to the normal 15,000,000 vehicle pace with 2009, and we see a deeper installation rate of 60%, satellite equipped cars in 2009 would be at 9,000,000. That represents a 2,400,000 increase in satellite equipped cars. Better still, by that point costs will be lower, and the merger will deliver a more unified SDARS platform.

This will take some time to play out, but in my opinion it will happen. What we virtually know is that car sales will return to normal, subsidy costs will decrease, and installation rates will increase. People already feel that the OEM channel represents growth in SDARS. What some people and even analysts do not understand is how drastic and impressive that growth will become as car sales recover.

Position - Long SIRI, No Position GM

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This article has 7 comments:

  •  
    Aug 19 11:23 AM
    Tyler, the big difference this time around is the availablity of financing...or lack of it.
    Reply
  •  
    Aug 19 11:52 AM
    I had a Ford Fusion rental car over the weekend with Sirius installed. Was so nice to be out of my own car and still have Sirius. The current customer base will keep Sirius as they move on into new cars, while people who dont have it get exposure through rentals, etc.
    Reply
  •  
    Aug 19 12:18 PM
    Financing issue will be ok fatcat.....you beat that subject to death. LOL
    Reply
  •  
    Aug 19 02:25 PM
    EVERYONE WHO HOLDS SHARES,, JUST BUY A SUBSCRIPTION TO SIRIUS XM... I have been putting bumper stickers on my car and advertising for them as well (FOR FREE) The more subscriptions they get eventually the stock will reflect that which would move it up. Ask ur friends to get subscriptions too! I have lost allot of money in this stock and I just want to break even! I will do whatever it takes! So buy some subscriptions!
    Reply
  •  
    Aug 19 02:46 PM
    How will buying, say, an OEM Sirius radio now in a new car be affected when an interoperable SiriusXM unit becomes standard within the next few years? Will those new car buyers be limited in their reception of both systems, or is there a fix in place to guarantee long-term functionality of the merged networks in cars currently being sold?
    Reply
  •  
    Aug 19 03:21 PM
    Tyler, In an interview Mel stated that satillite radio will be in more car models, resulting in higehr sales in new cars, even though overall car sales will be down. Mel said that we will sell more satillite radios in 2008 than 2007, so some growth is there.
    Reply
  •  
    Aug 20 01:43 AM
    fatcat, Are you talking about financing for autos, because as Chrysler just announced, they will not be providing lease financing any more. If the other car companies follow suit this will change the way Dealers sell cars in the future and whether or not they will be able to remain in business. The CEO of Auto Nation just talked about this issue on CNBC and was refreshingly "Frank" about this newly emerging dealership issue. Leases and Lease financing by the auto manufacturer is an important part of the dealerships partnership and business model viability. We'll have to see how this plays out.
    Reply
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