Why Sirius XM (SIRI) Stock Is a Strong Buy After Earnings

Shares of satellite radio provider Sirius XM (SIRI) are jumping on Tuesday after what was frankly a boring second-quarter earnings report. Earnings of 3 cents per share and revenue of $1.12 billion were both exactly what Wall Street expected.

sirius xm radioSo why on earth would SIRI stock jump about 3% at the start of trading if it merely reiterated what everyone expected?

As it so often does, the tiebreaker goes to guidance, where management raised expectations for full-year new subscriber additions and revenue. In January, SIRI expected to get 1.2 million subscriber additions in 2015; six months later, it’s looking for 1.8 million.

SIRI stock is now up 11% this year, a full 10 percentage points better than the S&P 500 and 21 percentage points better than rival Pandora‘s (P) negative 10% return to-date.

Here’s why it’s finally time for SIRI to bust off some historic gains.

Strong Auto Market, Loyal Customers

The not-so-hidden driver behind Sirius XM’s bullish guidance today is the auto industry, which is on pace for its best year in at least a decade. The National Automobile Dealers Association expects U.S. vehicle sales of 17.2 million this year; if correct, 2015 will be the best year for auto sales in a long time, beating the 16.9 million that sold in 2005. The last time sales eclipsed 17 million was 2001.

Owners of SIRI stock are keenly aware of the company’s self-professed “dependence” on the auto industry, as free subscriptions to Sirius XM come standard in many models.

So the fact that SIRI is adding more subscribers as auto sales go through the roof isn’t particularly surprising. What’s great is that people are showing a willingness to pay for Sirius after the promotions are over. Those customers are called self-pay subscribers, and net self-pay subscriber additions came in at 519,000 last quarter — 37% more than the 380,000 increase seen in the year-ago period.

But it gets better. From the SIRI earnings release this morning:

“The self-pay churn rate of 1.6% in the second quarter was the best on record since Sirius and XM were combined in 2008, a decrease from 1.8% in the prior year period. This trend demonstrates the strong, sustainable demand for satellite radio.”

The churn rate represents the percentage of self-pay subscribers that cancel in a certain period. With tiered subscription levels ranging from $10.99 a month to $19.99 per month, Sirius can be twice as expensive as Spotify Premium ($9.99 per month) and four times the cost of Pandora One ($4.99 per month), so retaining its paying subscribers at such a high rate is no small feat.

I don’t often change my mind entirely on a stock because of one solid quarter of earnings, but SIRI is an exception. Yesterday I was utterly indifferent towards it; today, after seeing the proof in the pudding, I think it’s a buy and one of the big winners this earnings season.

As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.

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