Sirius XM (SIRI, Financial) had an outstanding quarter on the back of strong new car sales that are driving its subscriber growth. Its new car sales penetration during the third quarter came at 71.5%, up about 2.8 points from the same quarter last year. It had a record high 26.7 million paid subscribers that includes 22 million paid self-pay subscribers.
Looking ahead, the company continues to see strong growth momentum in its net subscribers. Also, it expects the auto sales to increase about 5% to 16.4 million that should enhance its results this year. Sirius has additionally raised its guidance for subscriber, revenue and free cash flow for the year. Sirius now expects total net addition of approximately 1.5 million, $4.15 billion in revenue and nearly $1.12 billion in free cash flow respectively.
These are indeed impressive numbers. Moreover, the company continues to capitalize on its other capabilities such as increasing dealers, new content, used car trail programs and lower priced subscription packages. Also, the company is strategically investing in long-term growth prospects for its satellite radio business along with running and connected vehicle business. Alongside, it is heavily investing in media capabilities that should certainly deliver high margins in the upcoming quarters. These strategic initiatives should undeniably improvise its top as well as bottom lines performance going forward.
New and pre-owned market to gear up its performance
According to The Detroit News, “Advertising and strong sales are expected to continue through December, putting the auto industry on track to sell about 16.5 million cars and trucks in 2014 — its best year since it hit the 16.1 million mark in 2007.” In fact, the automakers managed to sell nearly16.5 million cars and trucks in the month of November. Moreover, the selling pace of the industry exceeded 17.0 million cars and truck last month for the second time in the year.
This is certainly positive news for Sirius that looks pretty strong to take advantage of this growing opportunity. Sirius should benefit from the impressive new car sales. Its new car SAAR was up about 7% to 16.75 million during the third-quarter 2014. Going forward it is focusing on increasing sales for its factory-enabled vehicles and pre-owned vehicles. Sirius sees strong growth opportunity attached with its factory-enabled vehicles.
It is aggressively tapping this market. Sirius has approximately 68 million factory owned vehicles at the end of third quarter, which represents just 28% of the total vehicles on the road. It remains upbeat for its vehicles in operation to eventually match its new car penetration rate of 70%. This indicates strong growth potential for the company for its distribution channel or vehicles.
In addition, its pre-owned vehicle segment continues to make progress. Sirius is making significant progress executing its pre-owned business. At present, almost every automaker offers a SiriusXM trial with its certified preowned vehicle sales at every franchise dealer location. The company has over 14,000 auto dealers that provide SiriusXM trial program. This program is offered to the non-certified customers, which is up about 27% this year.
Content enhancement on the card
Sirius XM is regularly updating and enhancing its content. It has recently added a couple of potential new channels, new hosts, and new shows in the last reported quarter. Also, it has reinforced its music offering with three additional music channels for dance, women’s pop and country audiences. Moreover, Sirius is engaged bringing in various special-channels very often. It had recently brought in special channel featuring Barbra Streisand's music. It has also added a full-time Bleacher Radio channel, a new daily show on Mad Dog Sports Radio with Stephen A. Smith, the popular sport media personality and added a show by Hall of Fame Golfer Freddie Couples to the growing lineup of our PGA TOUR Radio.
Apart from these, the company is working with YouTube. It has recently created YouTube 15, which is an exclusive weekly countdown show that uses their trending data to showcase the newest music emerging online. Also, it has added a new weekly show with Randi Zuckerberg to its Wharton Business Radio channel and dedicated a new broadcast facility at Wharton's Philadelphia campus.
Sirius has additionally launched a new daily talk show with Jenny McCarthy, and it's already receiving widespread media attention. Further, it remains on track to launch a full-time channel from international music star Pitbull in the beginning of next calendar year. These enhancements should drive user engagement and augment its performance going forward.
Final take and valuations
Sirius XM looks good with its new business initiatives and strong outlook for auto sales this year. The analysts expect its earnings to grow at CAGR of 17.20%, greater than average industry CAGR of 16.45% for the next five years. This reflects tremendous growth potential for the stock in the long run. In fact, the stock carries attractive short-term return as its earnings are expected to grow at 33.30% this year and 50.00% by next year respectively.
Moreover, the stock shares cheap valuations. Its trailing P/E of 49.57 and forward P/E of 28.92 indicate certain growth for the stock in the future. It has strong performance and wealth metrics. It has profit and operating profit margins of 10.15% and 26.26% respectively, while its ROE stands at strong 20.72% for the trailing twelve months. Its balance sheet carries total cash of $103.58 million and total debt of $4.77 billion. Sirius has operating cash flow of $1.25 billion and leverage free cash flow of $937.52 million.
