Uptick In Car Sales Could Benefit SiriusXM

New vehicle sales in August reached the highest level since January of 2006, coming in at a seasonally adjusted annual rate of 17.5 million, and the first time the industry has been over 17 million since July of 2006. The year to date sales total through August reached 11.3 million, about 5% higher than the same period last year.

According to seekingAlpha.com, This could be good short-term news for Sirius XM Holdings whose success is closely tied to the sales of new vehicles.

The company has agreements with OEMs that result in approximately 70% of the new vehicles sold giving the buyer a free trial of satellite radio, with the hope that a certain percentage will become self-pay subscribers. The percentage of new vehicle trials converting to paying subscribers has been eroding in recent years, declining from 46% in 2010 to 45% in 2011-2012, and 44% in 2013. For the past three quarters the conversion rate has declined further to 42%.

As the company increased its new vehicle penetration rate it meant that the satellite radios were being placed in less expensive vehicles. And, if one further expects that lower income households are buying lower priced vehicles, then the following statements made by Sirius XM CFO David Frear at the Bank of America Merrill Lynch Global Telecom and Media Conference comes into play:

• [the subscription is] something that's affordable by every household in the United States. People ask us a lot about income sensitivity and there is definitely a difference. So people who have the highest incomes convert higher and churn less and you can see a drop by a couple of points in every $25,000 of income.
• Zero to $50,000 a year households comprise believe it or not, a significant portion of new car sales in the United States and a very significant portion of used car sales.