WWE Needs to Diversify

Wham! World Wrestling Entertainment (NYSE: WWE  ) crushed a company record for event sales with the latest version of its annual extravaganza, WrestleMania. The event grossed $8.9 million -- a nice chunk of change, but the company needs more than a full house at its big event to get back on the growth wagon.

No longer on steroids
Once a reliable producer of growth, WWE has seen little of it lately. Revenue crawled up only 1% year over year for fiscal 2011 to hit $484 million. Nothing grew very impressively for the company, including the all-important live events and TV segment. Despite honest attempts at diversification, this unit still produces around 70% of company sales. It's too bad, then, that last year it took in only 2.5% more revenue on an annual basis.

A better opportunity for growth lies in international expansion. After all, the company actively produces shows all over the world, including hot economic regions like Asia. However, it also seems stuck overseas. The 2011 take from outside North America fell slightly year over year, while its percentage of overall revenue didn't budge, at 28%.

The only significant line item rising to any degree is the company's spending. Cost of revenue grew in both the company's latest reported quarter and fiscal year, at a respective 17% and 15% clip year over year. Yikes. Compounding this is the company's habit of blowing out its free cash flow via the payment of generous dividends. This is pleasant for shareholders in the short term, who are enjoying the stock's relatively high yield (nearly 6% at the moment), but it's clearly unsustainable.

DiversiMania should be running wild
The company will always rely heavily on live shows and TV. After all, such offerings are the roots of success for any sport -- just ask the NFL -- no matter whether the contest is spontaneous, scripted, or some combination of the two. Growth comes from skillfully leveraging those powerful assets in order to sell related products to loyal customers, and this is what WWE has struggled to do.

By contrast, look at Walt Disney (NYSE: DIS  ) . Its core is film and TV, but it then uses its strongest assets to create products across other business units, with an animated film character often becoming a child's toy, a theme ride at Disneyland, or the central figure in a spinoff TV series. As a result, the House of Mouse brings in balanced revenue from its various segments, with no one segment making up more than half its overall sales. Time Warner (NYSE: TWX  ) similarly encompasses all types of media, with assets it can leverage to produce profits across its business. This kind of spread greatly reduces the risk of one over-weighted division dragging down the results of the company as a whole.

Both companies have net margins that are currently around double those of WWE. They've also produced them more consistently over time, a stunt the wrestling firm hasn't yet managed to perform.

Coming soon to a TV near you...
But investors shouldn't tap out of WWE quite yet. Company chairman and CEO Vince McMahon is eternally ambitious and determined to succeed and thrive. More encouragingly, he's flexible in his approach to the business -- if one of the company's units starts lagging too far behind, he has little problem cutting it loose. Witness the short life of the XFL, an arena football league the firm operated for one mercifully brief season.

One eventual winner may be the WWE Network, a cable channel devoted entirely to wrestling. WWE has an immense library of classic footage of the sport, particularly in the wake of its acquiring rival promotions over the last decade or so.

The company's many devotees should provide a strong audience for the channel; if this can be leveraged into revenue and profit, it'll bring a touch of that much-needed diversification to WWE's business. A WWE investor can only watch and hope the results match the hype.

WWE will probably disappear from the ranks of high-yield dividend stocks in the near future, but we think this won't be the case for the companies featured in this free report.

Fool contributor Eric Volkman owns shares of WWE and, after all these years, still likes watching the company's shows once in a while. Motley Fool newsletter services have recommended buying shares of Walt Disney. The Motley Fool has a disclosure policy.
We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (3) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 11, 2012, at 3:41 PM, Jbay76 wrote:

    I think UFC has taken away wrestling's market share

  • Report this Comment On April 11, 2012, at 4:43 PM, itscomplicated4u wrote:

    Here are some major reasons why WWE is in big trouble:

    Even with Rock vs Cena and leakind Brocks return 24 hours before WM28 they still will most likely not beat their best ever buyrate.

    One week after Brock Lesnar returns to WWE the RAW ratings have fallen to pre Wrestlemania lows again. Not a good sign.

    The majority of UFC - Brock fans who followed Brock from WWE will not come back to WWE b/c they like the real mechanics of UFC vs. WWE's PG rated playfighting.

    The WWE network is already failing as they keep delaying initiative, no industry execs want to touch that gig, they have still not signed on with big cable providers. It smells of XFL all over again.

    They are watering down the biggest moneymaker they have (John Cena). If he turns heel they will then lose out on millions in merchandise sales and piss off the young kids. This is one massive slippery slope!

  • Report this Comment On April 13, 2012, at 2:38 PM, TonyinReno wrote:

    I think there is still the possibility of growing WWE's market. Vince McMahon has shown a lot of ambition in the past, but lately the TV shows have seemed a bit stale. Part of this is the strict PG tone of the shows lately. While I don't think Raw or Smackdown needs to be R rated, they need a little more edge. Perhaps one of the shows could develop a more mature attitude (or bring back the ECW, but make it crazy).

    And they need to develop some new talent. I'd like to see an expansion of women's wrestling, displaying more than just eye candy.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1859746, ~/Articles/ArticleHandler.aspx, 9/20/2014 10:26:28 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement