There is little doubt that the automobile sector (OEM Channel) delivers the vast majority of subscribers to Sirius XM Radio. It is for this reason alone that investors need to understand the OEM channel and how it impacts Sirius XM. Within the next week we will all once again be privy to new sales data. One clear example of such data is the use of a SAAR calculation for auto sales. SAAR stands for Seasonally Adjusted Annual Rate. It is a formula that takes the variables for the season when trying to determine an annual rate. This adjustment makes for more accurate comparisons, but does not consider many other factors, and thus investors need to look at the bigger picture when trying to find the correlation between the auto sector SAAR and satellite radio.

An obvious example was the Cash For Clunkers program. SAAR does not measure why people are buying cars. The fact that the government was helping the auto sales process is not really considered by SAAR. Yet another example occurred a few years ago when GM introduced a widely successful (in the short term) Employee Pricing campaign. A more recent example is the string of 0% deals that came on the heals of the Toyota melt down.

From a satellite radio perspective, the most important numbers are the Penetration Rate and the Conversion Rate. The Penetration Rate measures the percentage of cars that get satellite radio installed. The Conversion Rate measures the percentage of promotional subscribers that elect to become self paying subscribers. These are numbers you need to know.

So what is SAAR good for in terms of satellite radio? At this point it is a decent indication of what sales will be if current trends continue. The important notation investors need to consider is the trends that led to the current months sales, and the likelihood that those factors will remain in place over the course of a year. Currently we are seeing unprecedented numbers of manufacturers offering 0% deals. Savvy investors will be well aware that this trend can not continue.

Rather than concentrating on SAAR, investors should consider the real nuts and bolts. Sirius XM Radio guided that they based their guidance of auto sales being just over 11 million units for 2010. This means that the magic number is just under 1 million cars being sold each month. I have oft stated that what we want to see is auto sales at 1 million per month to realize growth in satellite radio. We should not care how it happens, just as long as it does. The current sales pace is being bolstered by consumer friendly financing. That is great news in the short term. As an investor you simply need to keep an eye on the numbers each month. With nearly 1/3 of the year complete, the numbers are ahead of pace for 2010. So far, so good.

Key points are that SAAR gives an impression of direction and trend, while actual sales numbers translate to actual subscribers. One number is far more meaningful to the short term, while the other gives a better long term impression.

Reference on SAAR in layman’s terms can be found at Investopedia

Position – Long Sirius XM Radio