Inside the Cage With WWE

I don't know how anyone can dislike wrasslin'. I love wrasslin'. L-U-V love it. Loved it since I was a kid, growing up in northern Minnesota. Back then, my weekend mornings were taken up with Vern Gagne's All-Star Wrestling, the TV showcase for the legendary American Wrestling Association (AWA).

Those were the days. It might have been 30-below outside, but inside, on the shag carpet, the world's finest scripted violence was beamed directly to our boob tube. Nothing beat sitting there, clad only in a pair of tidy whities, taking in the turnbuckle-smashing spectacle with a grilled cheese sandwich and a glass of milk.

For those of you who don't remember the AWA, remember this: It wasn't just former Minnesota Governor Jesse Ventura who got his start there. Much of the talent that made today's World Wrestling Entertainment (NYSE: WWE  ) came out of the Midwest scene as well. Wrestling icons like Hulk Hogan, Bobby "the brain" Heenan, the Road Warriors, and dozens of others got their start in the AWA before moving on to the rapidly expanding McMahon wrestling empire.

I suppose you could argue that I should be angry with McMahon. After all, he choked off many of the local circuits like the AWA and broke the old-school rules when he began assembling his cross-country kingdom. But on the other hand, WWE at least gives stock nerds like me the only chance we'll ever get to be a part of the game. (As hard as I search, those blood-soaked minor leagues don't seem to be listed on any reputable exchanges.)

Crowd-pleasing action
Today's WWE is a modestly sized entertainment and media company. With a smallish market cap of $870 million, it's no Disney (NYSE: DIS  ) , Pixar (Nasdaq: PIXR  ) , or even MarvelEnterprises (NYSE: MVL  ) . But over the years, Vince McMahon and his wife Linda, who run the operation with firm control -- maybe overly firm -- have learned how to squeeze a decent amount of money out of the age-old theme. People will always pay to see good putting a hammerlock on evil, and they'll keep coming back so long as good and evil trade places now and then. The music- and pyrotechnic-driven drama plays out at 300-plus live events each year, providing the bedrock on which the entire empire is based.

WWE's main revenue streams are:

  • Televised events, either pay per view (PPV) or network, which bring in advertising dollars
  • Live events, which bring in ticket sales
  • Branded merchandise, such as videos, shirts, and related magazines

One thing I really love about this company is that the financial reports are organized and written so clearly. They're incredibly well detailed, but even a wrasslin' fan or other small-brained Fool (like me) can understand them. The verbiage is not immune from corporate excuse making, but they don't try to hide the warts, and the numbers are broken down to give you a great sense of what's working and what isn't. They expense stock compensation costs right there on the statement of operations, too, and provide not just a cash flow statement but also a supplemental table calculating free cash flow. Talk about making things easy. Serial obfuscators -- palmOne (Nasdaq: PLMO  ) comes to mind -- could learn a thing or two from WWE.

As we've mentioned here at the Fool a couple of times, lately, the WWE looked to be in the midst of a turnaround. Revenues had leveled off, even nosed upward, and costs were coming under control after a pretty tough fiscal 2003, in which the cost of dumpstering unprofitable operations (Can you say "XFL"?) conspired to drop the bottom line to $0.28 per share.

Margins were coming up -- a nice change from the bad old days when the firm just couldn't seem to do anything right. At year's end, things looked downright decent. A big increase in PPV buys, plus a 17% increase in live-event revenues, helped bring fourth-quarter revenues up to $126.7 million, a 20% bump over the prior-year period. TV revenues were just about flat, though the income was transferred from an advertising revenue system to a broadcast-rights fees arrangement. Branded merchandise sales rose 30%, mostly on the back of a threefold increase in home-video sales.

For the full year, revenues inched upward to $374.9 million, only half a million bucks better than the year before. But due to tighter cost controls that brought a 13% decrease in SG&A expenses, WWE booked earnings of $0.70 per share. Not bad, eh?

Scary reversal
Wrasslin' fans can predict what's coming next. Through a combination of wholesome arm bars and dropkicks, our hero looks to be at the top of his game. But then - wham! -- someone clocks him with the ringside bell. All that hard work is gone, and the whole match is up in the air again.

That's a little bit like what happened halfway through the full-year earnings report. Management's outlook predicts revenues around $350 million and earnings at just less than $0.50 per stub. The guidance may not have surprised analysts, who are used to being lowballed by WWE, but the digits were far enough below their official estimates that the stock took a bit of a drubbing, and even I had to field a few panicked emails demanding, "What should we do, Fool?" Let's try to figure that out.

Are the glory days gone?
That's what many observers seem to think. And they've got good evidence on their side. Average attendance at both domestic and international live events has been dwindling for years, a trend that continued into the end of last year. Is this the outlook for the future?

Unfortunately, the predicted revenue malaise for the coming year looks like it's a trend that wrestling fans hoped had come to an end in 2003. Like a perennial loser's razor-scarred forehead, the WWE's revenue picture has been getting uglier over time.

Year Revs (MM) Change
1999 $251.5 -
2000 $379.3 51%
2001 $456.0 20%
2002 $425.0 -7%
2003 $374.3 -12%
2004 $374.9 0%
Guidance: 2005 $350 -7%


Things peaked back in 2001, and we pencil-neck, pencil-pushing geeks -- as Freddie Blassie would have called us -- have already figured out that the compound annual growth rate here is a measly 4%.

The earnings picture is even more unsightly.

Year EPS
1999 $0.99
2000 $0.95
2001 $0.88
2002 $0.53
2003 ($0.28)
2004 $0.72
2005 $0.48


Ouch. It certainly looks like the good times ended at $0.99 in '99, and the bottom line has been shrinking toward Mean Gene Ockerlund stature ever since.

Of course, buying stocks is about buying future results. We can't dwell on the past; after all, Hulk Hogan isn't wrestling Andre the Giant anymore.

Unpredictable outcome
When I began eyeballing WWE earlier this year, what impressed me most was the pretty hefty stash of cash and short-term investments ($273 million, or nearly $4 per share at the end of the year) along with the firm's habit of churning up more fresh green. Remember those cost controls I mentioned? Moves like that have helped the company generate free cash flow of $14 million in 2003 and $38 million in 2004, some of which is spent on a 1.88% dividend yield.

Adding the paltry $8 million in long-term debt and backing out that big cash and investment position leaves us with an enterprise value-to-free cash flow number of 16. That's a lot cheaper than the market in general, and if the company resists temptations like this year's $20 million worth of corporate aircraft, next year's free cash flow will probably be about $10 million better.

The split decision
When it comes to wringing out profits, WWE is clearly at the top of its game. The question for investors is whether they're willing to buy into a company with such a murky revenue picture. For my own part, I suspect revenues will remain in a slow-growth phase for quite a while. But on the other hand, wrasslin' ain't goin' nowhere anytime soon, so I'm also confident that there will be few nasty downside surprises.

So long as WWE keeps a headlock on costs and continues to reward investors with a dividend and ample free cash flow, I'd be glad to keep it on my tag team. And if investor uncertainty drops the price over the next few months, that would help seal the deal. But if you get in the ring with these brutes, keep your eyes peeled. A big drop in revenues, like a folding chair to the back of the head, could change the direction of the match in a flash.

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Fool contributor Seth Jayson owns shares of Marvel but has no position in any other company mentioned. View his Fool profile here. The Motley Fool is Fools writing for Fools.


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