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Car sales in the United States are in a funk. Even with a strong June, the current annualized rate of about 10 million vehicles sold will not be enough to compensate for scrapped cars and population growth.
Yet the best investment play on an American recovery may not be a car company or parts maker. Instead, it may be Sirius XM, the company that operates the subscription satellite radio service.
This is partly a process of elimination. Two of Detroit’s Big Three — Chrysler and General Motors — are in bankruptcy. Ford is, of course, an investment option. But some 40 percent of Ford’s sales come from abroad, so it’s not a pure play on the domestic market. And while there are domestic parts companies, the industry pressures they face make them look like very risky investments.
Now consider Sirius XM. Its services are available only in North America. Nearly all of the $2.4 billion in sales the company should rack up this year come from car owners. They pay around $17 a month to listen to some or all of its 300 channels, and plenty of new cars come with free trials to hook new subscribers. So Sirius XM, which has suffered with the auto industry’s downturn, may now be set to benefit from any recovery.
Suppose the company can increase its 19 million subscribers by 15 percent a year over the next 10 years, to about 75 million. That’s fast, but credible. That would still account for less than a third of all vehicles on the road today. In contrast, more than 80 percent of all homes have pay television services like cable or satellite.
Investors currently value cable TV subscribers at about $1,000 each, according to Sanford C. Bernstein & Company. Satellite radio subscriptions cost less than half those of television, so let’s assume that each subscriber may be worth $450. At 75 million customers, that’s a total value of some $34 billion by 2019, ignoring the effects of inflation.
Discount that back by 15 percent a year to account for the time value of money and the uncertainty of reaching ambitious subscriber targets, and Sirius XM’s business could be worth about $8.3 billion today. After subtracting debt and accounting for warrants owned by the media mogul John Malone, that equates to about $5.9 billion of equity value, or around 93 cents a share. That leaves room for today’s stock price to more than double.
Of course, the company has disappointed shareholders before. But investors keen to wager on the domestic auto industry’s rebound may want to switch on the radio.
Keeping a Safe Haven
The Swiss National Bank is not pleased about the speculation in the Swiss franc in currency markets. Several times since March, the bank has stepped in by suddenly selling francs to buy dollars or euros. Each time, the value of the franc has plunged.
Official interventions in currency markets often misfire. The speculators win, leaving central banks nursing losses. But the central banks that lose are usually trying to prop their currencies up. The Swiss National Bank is trying to keep a strong one from becoming still stronger. So far, its attacks have scored easily.
Investors’ goals and those of the Swiss National Bank clash. Foreigners like the Swiss franc as a safe haven, but the last thing Switzerland needs is a stronger franc. That would reduce the price of imported goods, exacerbating deflation. As it is, prices are expected to fall by 0.5 percent this year.
The Swiss National Bank’s threshold appears to be at an exchange rate of 1.5 francs to the euro. The central bank’s intervention this week quickly sent the rate up to 1.53. Something similar happened last week. Traders were left reeling.
Swiss currency policy ties in with monetary policy that aims to prevent deflation from becoming worse. The bank has almost tripled the monetary base in the last year. But the money isn’t being put to use. Credit is still tight, but it would be worse without the monetary expansion.
The Organization for Economic Cooperation and Development suggested last week that the Swiss should add more fiscal stimulus to their weaponry. But as the United States and Britain are showing, fiscal stimulus can quickly rack up deficits and debt. The Swiss are right to see monetary policy as more flexible, potent and reversible. And their currency interventions will do no harm at all.
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