As the Cash for Clunkers campaign continues thanks to an additional $2 billion in government funds, Ford (F) has shifted some of the focus to the trucking side of their fleet. A new television campaign has been rolled out that states, "Bring in your old truck and drive off in an all new F150. All you need is a 2 miles per gallon improvement, and you qualify for a $4,500 rebate."
The initial phase of the C.A.R.S. campaign was successful in seeing a lot of older trucks and SUV's traded in for mostly sedans. Some auto manufacturers have already had trouble meeting demand on certain fuel efficient models, and have ramped up production again to try to meet demand. Ford has done the same, but is also making the public aware that trucks can qualify under the program as well.
This bodes well for satellite radio. Some of the models with the biggest penetration rates have been trucks and SUV's. Those same trucks and SUV's have also been a big part of the inventory problem for OEM's. While Ford's inventory of trucks and SUV's have already been in the subscriber rolls of Sirius XM (SIRI), the normalization and balance of production and sales will help the OEM channel going forward.
It is a normalized supply and demand, and increased consumer confidence that will help satellite radio the most. The C.A.R.S. program will deliver about 750,000 new car sales, and increase consumer interest, but what SDARS needs is a steady climb to 1.3 million car sales per month. Here at SiriusBuzz, we have made it a point to keep you informed as to the impacts of OEM channel on subscribers as well as other metrics, but subscribers has always seemed to be the central thought when discussing the OEM channel.
Sirius XM announced that their EBITDA will be over $400 million for 2009. They have already delivered $241 million of that, and with two quarters left, the goal seems very attainable. What investors need to realize is the impact that the OEM channel has on the $400 million guidance offered by Sirius XM. Satellite radio installations cost money, and that money impacts EBITDA. If there is a huge rush to production in the OEM channel, there will be costs.
A steady and predictable pace of production and sales is what is most healthy for Sirius XM. Mel Karmazin's guidance was based on 9,000,000 cars being sold in 2009. Through the halfway point, the OEM channel was at about 4.6 million cars August delivered another 1 million. If the 1 million per month pace continues, the 2009 sales figure will be 10.6 million. That is 1.6 million above what Mel used in modeling his guidance. Knowing how Mel works, he has likely held back a bit. The "over $400 million" guidance is already assumed to be "safe" by many analysts. The going assumption is that the company has potential to be closer to $500 million. I think a little caution, and another quarter of data, is needed before assigning a bigger number than the guidance of "over $400 million."
I believe that Mel's guidance is money in the bank at 9 million auto sales, very safe with 10 million, and even attainable at 11 million in car sales. What investors need to understand is that as car sales go higher, the EBITDA number goes down. This is not a bad thing, in that the company is investing into building the subscriber base with each OEM installation. It is simply the reality of the situation.
If there is a shift in Cash For Clunkers from cars to trucks, the Big 3 will begin to have a bigger advantage, as they manufacture and sell more than the imports. In the first phase of the program, it was the imports that gained the biggest advantage with 55% of the new sales coming their way. Ford's move to trucks will likely be followed by similar moves by GM and Chrysler. This will help balance inventory, and shift installations to models and manufacturers that carry higher satellite radio penetration rates.
What satellite radio investors want to see is a normalization in the OEM channel that delivers an auto sales number of 11,000,00 for 2009. This will virtually ensure that guidance is meet, and if the company can deliver on other metrics, they should have a good ability to give 2010 guidance that allows them to show growth even with auto sales improving.
Position - Long Sirius XM Radio, No Position OEM's