) will release its Q3 2013 earnings on October 24th. Given the
continued strength in U.S. car sales, we expect the company's net
subscriber additions to remain strong during the quarter. Although
Sirius XM has been pursuing the used-car market, its business is
still largely tied up with the level of new car sales.
Additionally, given that the new pricing has been rolled out
completely, we expect strong revenue growth accompanied by
operating leverage gain which will positively impact the
Sirius XM has been an incredible success story so far but the
competetive landscape might change with Apple (
) and Pandora (
) pursuing the in-vehicle radio market.
Our price estimate for Sirius XM stands $3.20
, implying a discount of about 20% to the market price.
See our complete analysis for Sirius XM
Sirius XM's Will Find Support From The Continued Strength
In The U.S. Automotive Market
The overall U.S. auto sales grew by roughly 8% in the third
quarter of 2013 despite a slowdown in September. For the month of
June, the figure jumped 9.2% amounting to 1.4 million units. This
growth was the highest the industry has seen in the last five years
and stood notably above the figure for the first half of the year.
August was even better with vehicle sales surging by 17% However,
September saw a slowdown as sales fell by 4.2% according to the
data available with the Wall Street Journal.
How The Market Grew In The First Half Of 2013?
U.S. car buyers purchased roughly 1.4 million cars and light
trucks in June bringing the half year new vehicle sales to about
7.8 million. This implies growth of roughly 7.7% over the first
half of 2012 which suggests that the U.S. automotive industry could
see another record year as sales continue to climb since the
recession of 2008-2009. Vehicle sales for Q1 2013 reached about 3.7
million, implying growth of roughly 7% over the first quarter of
2012. However, this growth accelerated slightly in the second
quarter with June sales increasing by more than 9% over the same
period last year. Sirius XM stated during its Q2 2013 earnings
announcement that vehicle sales in the U.S. could reach 15.5
million this year thanks to the gradual improvement in the economy
and better financing deals.
Margins Will Show Improvement
Sirius XM's topline growth hasn't come at the expense of its
margins, thanks to the popularity of its subscription model. This
is one of the reasons why the stock has gone up significantly this
year. The company's price increases have been well-received and the
content quality and variety keep customers interested. This has
helped Sirius XM manage its content costs much more efficiently
than other radio services operators such as Pandora (
). We expect this trend to continue in the third quarter.
Sirius XM's overall content costs, which include revenue sharing
& royalty costs as well as programming & content costs,
account for about 37% of its total operating expenses. As a
percentage of revenues, these costs declined from 31% in 2009 to
28% in 2012. For the first half of 2013, the figure maintained the
level of 28%. This may be surprising given that the royalty rates
for music increased each of these years, which is primarily the
reason why Sirius XM's competitor Pandora is still making losses.
However, unlike Pandora, Sirius XM can afford a wide variety of
content including talk shows and sports programming due to its
subscription-based business model. We believe that the company has
done well in terms of saving money on these content agreements due
to its strong negotiating power and the absence of a central body
governing the rates. After the merger of Sirius and XM, the company
started reducing duplicate programming and has renewed or replaced
expiring agreements on more cost effective terms.
Sirius XM's subscriber acquisition costs primarily include
hardware subsidies paid to radio manufacturers, distributors and
automakers, device royalties for certain radios and chip sets,
commissions paid to automakers and product warranty obligations. As
a percentage of revenues, these costs have been declining and we
expect the trend to continue in Q3. As the brand value increases
and the service becomes popular among customers and original
equipment manufacturers, Sirius XM will need to pay less
commissions and subsidies.
How a Company's Products Impact its Stock Price at