Last Friday, the decision of the three-judge panel of the Copyright Royalty Board came expected for Sirius XM Radio Inc (NASDAQ:SIRI). The royalty fee that SIRI was required to pay content owners i.e. music companies, over the next five years, was a big “if” on its stock performance. Fortunately Sirius XM Radio Inc (NASDAQ:SIRI) got better terms than initial forecasts by analysts.

Sirius XM

From January 2013, Sirius XM Radio Inc (NASDAQ:SIRI) will have to pay the recorded music companies 9 percent of its gross turnover, up from the previous highs of 8 percent. Additionally, the royalty rates will increase by 50 basis points (0.50%) every year till 2017. Bank of America  Merrill Lynch analysts believes that the ruling turned in favor of SIRI. Jessica R. Cohen, a research analyst at Bank of America Merrill Lynch, thinks that Sirius XM can easily pass through this Music Royalty Fee (MRF) to customers, just like the company has been doing so far.

Analysts think that the 9 percent royalty rate plus 0.50 percent annual increase is modest, especially when you compare it with what SoundExchange was demanding: 12-20 percent of gross revenues. So, any increase in rates will be margin-neutral.

BofA Merrill Lynch already had a Buy rating with $4 price target. After the newfound certainty in royalty rates, the price targets across the Wall Street are expected to rise. BofA Merrill Lynch’s price target is based on expectations of stronger revenues, EBITDA and DCF-valuation. Sirius XM is currently trading at 22.3x PE, 16.1x EBITDA. BAML expects earnings to grow at an annual rate of 33 percent.

Despite the positive outlook, Sirius XM Radio Inc (NASDAQ:SIRI) has certain risks. 1) Macro environment, especially auto sales, will have a direct impact on the number of Satellite Radio subscribers. Though auto sales have registered growth after 2009, they are still well below analysts’ estimates. 2) Though the offerings of Sirius XM are unique, the audio-entertainment market is extremely competitive. And IP-radio, which is still in its initial stages, poses an increasing threat to terrestrial radio.