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SIRIUS XM Radio Inc. (SIRI) Driving Higher On Car Sales And Catalysts

 October 11, 2012 03:38 PM

(By Rich Bieglmeier) On Wednesday, October 10, 2012, SIRIUS XM Radio Inc. (SIRI) announced net subscriber additions were 445,921 in the quarter ended September 30, 2012, and ended the third quarter with a record 23,365,383 subscribers.  SIRI lifted its net subscriber additions guidance to 1.8 million from 1.6 million for 2012.

Chief Executive Officer, Mel Karmazin said, "These strong net additions produced our best third quarter since the merger and exceeded third quarter 2011 subscriber growth by 34%. With almost 1.5 million net subscribers already added in 2012 and continuing growth in auto sales, we will significantly exceed our previous guidance of 1.6 million, marking our third increase in subscriber guidance this year and putting us on track for record post-merger net additions."

[Related -Sirius XM Holdings Inc. (SIRI): Turning The Dial To $4.20 Per Share?]

For those who are unfamiliar with SIRIUS XM Radio's business, the company provides online and satellite radio services in the United States and Canada. The company broadcasts approximately 135 channels, including music, sports, entertainment, comedy, talk, news, traffic, and weather channels for a subscription fee.

The entertainment company has more subscribers than, Time Warner Cable, Dish, DirecTV, on par with Comcast, and within a million of NFLX.

The company is heavily reliant on new auto sales, as you can tell from Mr. Karmazin's statement. For 2013, Edmunds.com forecasts 15 million new-car sales, up from 2012's 14.6 million unit pace. Industry experts believe auto sales will rise through 2016. Additionally, SIRI has initiated a used car campaign. Overall, the company estimates "100 million satellite radio-equipped vehicle base by 2017, up from an estimated 44 million today." That's good news.

[Related -Sirius XM Radio Inc (SIRI) Q3 Earnings Preview: Turning Down The Dial]

Besides auto audio entertainment, ABI Research estimates that 75% of new U.S. cars in will offer telematics for safety & security by 2017, up from 30% today. On September 24, 2012, SIRIUS entered into first telematics agreement with Nissan North America as the "exclusive provider of a comprehensive suite of premium telematics services for Nissan branded vehicles."

Monthly subscriptions for competitor OnStar start at $18.95 and $28.90 with GPS directions. Meanwhile, Ford's Synch is priced – as best we can tell – at $60 per year. The Nissan press release didn't include pricing info, but iStock would expect it to be more in line with OnStar than Synch. According to Edmunds.com, Nissan has roughly 8% of the U.S. new car market – that's 1.2 million potential customers based on 2013 auto sales estimates – do the math.

Internet radio is a 3rd way SIRIUS can fatten its bottom-line. Friday Morning Quarterback (FMQB) says, "Online radio and on-demand services remain the fastest growing form of music consumption in the U.S." Pandora dominates the space with half of all Internet users in the second quarter, according to FMQB. However, SIRIUS XM currently enjoys the competitive advantage of paying a lower royalty rate than internet radio competitors. The edge could be erased by The Internet Radio Fairness Bill, H.R. 6480, which was introduced on September 21, 2012. More yeas than nays vote for H.R. 6480 wouldn't hurt SIRI, but it would be a big plus for Pandora Media, Inc. (P). If the nays win out, it could be a plus for SIRIUS.

In August, Liberty Media Corporation (LMCA) asked the FCC for approval to take outright control of SIRIUS XM Radio. LMCA currently owns roughly 48% of SIRI between common and preferred stock. If they get the FCC OK, then Liberty Media will increase their stake above 50%. The answer is expected before the end of 2012.

Finally, SIRI could benefit from a couple of year-end catalysts. Car sales tend to rise, aggressively, in the first half of December, and the Consumer Electronics Association (CEA) reports that consumers plan on spending the most money on holiday, technology gifts since 2007, which includes in car entertainment. Overall, iStock thinks SIRIUS XM Radio Inc. (SIRI) has the ball headed in the right direction for shareholders. If management is successful in penetrating the telematics business, and gaining market share in the internet radio space, all while car sales continue to improve, then we can see the stock price challenging $4. But then again, Liberty Media might decide 50% isn't enough and just buy SIRI outright.



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