According to industry analysts auto production in the U.S. could see a 7% jump in 2011 over that which we saw in 2010. The numbers seem to dictate that roughly 12.6 million cars will be produced for the U.S. market stateside. Production increases as well as the new way auto makers are doing business, bodes well for satellite radio investors on a few fronts:
Higher Production Means More Auto Sales Anticipated
Analysts have been projecting U.S. sales at approximately 12.8 million in 2011. Some experts are even projecting sales as high as 13 million. To reach these sales numbers auto makers must produce more, and more production translates into added subscribers. Sirius XM is installed in roughly 60% of cars sold in the United States. With 2010 coming in at just under 12 million, the increase will mean that about 650,000 additional satellite radio's will be installed this year. With a 45% take rate, there will be about 300,000 more paying subscribers from the 2011 crop of new car sales above and beyond the estimated 5.4 million from 2010. 300,000 Paying subscribers may not seem like much, but it represents over $46 million in added revenue. That is nothing to scoff at.
Auto Makers Have Tighter Inventories
The latest trend in many industries is cutting down on inventory levels. Auto makers are no exception. For Sirius XM a tighter inventory on the OEM front is good news. Sirius XM subsidizes a lot of the cost for satellite radio installations. The longer a car sits in inventory the longer it is not generating revenue for the company. Obviously cutting down on the time between manufacture and sale helps Sirius XM's cash flow. One key to success in anything is to get a return on your investment as quickly as possible.
A Brighter Economy
The economy has been a concern for many for quite some time. Knowing that the auto industry is anticipating greater sales is a signal that things may be loosening up a bit. More U.S. based production helps auto workers and every category of auto suppliers bolster their business. More tires, mufflers, engines, and even satellite radios will be needed to meet the higher production. Auto companies do not make moves to increase production on whims. They gauge demand and put countless hours of study into these decisions. If their conclusion is better auto sales than we can assume with a level of confidence that the gears of the U.S. economy are finally starting to turn.
What I like about the increased production and sales is that it is happening at a rate that Sirius XM can absorb. Sudden starts and stops can cause a roller coaster in the metrics of Sirius XM, while a gradual increase can be handled much more efficiently and effectively.
Position - Long Sirius XM Satellite Radio