Lower gas prices have been an early Christmas present for Americans. The dramatic drop in crude oil prices this fall has pushed pump prices on average down from $3.70 all the way to $2.75, and it could plunge even further. An Oklahoma gas station recently dropped its price for unleaded to $1.99, the first time in over four years that gas has fallen below $2 in the U.S, and several others have joined it.
The fall in gas prices was completely unexpected -- the Energy Information Administration at the beginning of 2014 predicted $105 as the average price for Brent crude this year. The implications of this shift are widespread, most obviously for producers and other areas of the energy sector, but also throughout the economy. Estimates indicate American households have saved $100 billion so far this year, just in time for the holiday season, and even more savings to come.
Two hidden winners from lower gas prices could be Sirius XM (SIRI -0.79%) and Pandora Media (P). Why? Because these services are most often used in the car, and lower gas prices are likely to encourage Americans to put in more miles behind the wheel. Let's look some recent evidence of this trend.
Auto sales are already surging
The 1.3 million vehicles sold in the U.S. in November was the highest number for that month since 2003, topping analyst estimates and rising 4.6% from a year ago. Automakers have highlighted lower gas prices as a major reason for increased buying, noting that sales of gas-guzzlers like SUVs and pickup trucks have particularly jumped . As further evidence the increase could be related to lower gas prices, Canadian auto sales increased 3.6% during November to a new record for the month, while sales in the U.K. were up 11% in the past month.
The jump in sales is a clear boon for the automakers, and they might be equally beneficial for the audio entertainment providers. Sirius XM radios are only installed in about 26% in cars on the road in the U.S., but agreements with all major automakers mean the company's radios come in most new cars, often with a free trial. Sirius XM states in its risk factors that the business "depends in large part on the auto industry," and discussion of auto sales and relationships is heavily featured on the company's earnings calls.
Pandora isn't as dependent on new car sales as Sirius XM, but its presence in new vehicles has been growing fast. The company now offers its services in 135 auto models from 26 different car manufacturers. Unlike Sirius XM, which generates almost all of its revenue from subscriptions, Pandora is primarily dependent on advertising. So while new vehicle sales themselves aren't that important, the resulting increase in radio listening is. The terrestrial radio industry generated $17.6 billion in advertising last year, half of which came from the car, meaning it's still the primary opportunity for Pandora, and increased listening should also help drive subscriptions sales as listenership increases.
Will gas prices stay down?
While there's no guarantee oil prices will remain low, most economists think the savings will persist at least through next year. The EIA predicted an average of $83 per barrel of Brent crude for 2015, and the Saudis just announced they are lowering prices again on oil exported to American markets to try to weed out U.S. suppliers. No one knows how this game of "chicken" will turn out, but prices could easily fall further before they rise again.
Pandora, especially, could use the help. The Internet DJ's stock is flirting with 52-week lows as concerns have grown about its minimal profitability and declining listener growth rate. Expected increases in content costs would also make new advertising revenue from additional driving particularly valuable. Sirius XM, meanwhile, is in a more comfortable position, having seen subscriber numbers steadily increase over the past few years. Still, investors have bid the stock up significantly -- it now trades at a P/E of 50, so a revenue increase would take some of the pressure off that high valuation.
Keep your eye on auto sales, which should be the best indicator of Sirius XM's and Pandora's near future. Both stocks have yet to react to the fall in gas prices, so investors could get an upside surprise next year once these companies begin to reap the rewards.
