Satellite Radio Playground

by Demian Russian

With auto sales being so closely tied to Sirius XM Radio’s (NASDAQ: SIRI) business model, it’s important for investors to follow the OEM sector closely. With Edmunds reporting yesterday that early July sales were tracking close to a 12 million SAAR (Seasonally Adjusted Annualized Rate), it may appear on the surface that a full recovery is underway, but it’s a lot more complicated than that. As this summer moves into a period where year-over-year comparisons are made with last summer’s Cash For Clunkers period, tracking auto sales trends becomes more confusing.

According to Edmunds CEO Jeremy Anwyl, July and August are traditionally bargain shopping months because of model year close-outs. “July and August sales may suggest a rebound, but the underlying trends haven’t changed,” he explains. According to Edmunds’ analysis, 88 percent of new cars sold last month were from the 2010 model year. Edmunds Senior Analyst Jessica Caldwell pointed out that many consumers have a psychology that now is a good time to buy a new car due to the perception that incentives are high during this period, but in actuality current incentives are not especially generous right now.

“Inventory is relatively low and automakers are reluctant to cut into profit margins more than necessary. However, brands are advertising big sales events and consumers are responding.”

– Jessica Caldwell, Director of Pricing and Industry Analysis at Edmunds

Another issue to consider is the state of the subprime credit environment. In 2009, the subprime lending approval rate crashed to 5% from an historic 60% average. It’s only recovered to 9%, with less than one in ten subprime auto purchase loans being approved. Subprime customers are currently responsible for only 1% of General Motors’ annual sales. There are signs that subprime lending is expanding, with Chrysler and GM initiating relationships with subprime lending arms, but how long until full recovery kicks in? “Everyone’s being kind of cautious still because they’re afraid of a double-dip recession and unemployment is still high,” says Fitch Ratings analyst Meghan Neenan. Read More