World Wrestling Entertainment Crashes: Buying Opportunity or Time to Run?

World Wrestling Entertaiment was painfully slammed down on Friday, but the fight isn't over yet. Could this be a buying opportunity?

May 19, 2014 at 9:34AM

Wwe Image

Source: World Wrestling Entertainment.

Shares of World Wrestling Entertainment (NYSE:WWE) were slammed to the ground on Friday, falling by 43.45% as investors reacted with pessimism to news that the company has signed a new licensing deal with NBCUniversal that was below expectations. Is the dip in World Wrestling Entertainment a buying opportunity, or should investors sell the stock before things continue getting worse?

Against the ropes
World Wrestling Entertainment has reached a new licensing agreement for its two main programs, Raw on USA Network and SmackDown on SyFy. The financial terms of the new agreement weren't officially disclosed, but the company estimates it will be increasing the annual value of its worldwide television agreements by $92 million to $200 million. According to a press release:

Over the past six months, the company has negotiated television distribution agreements in the U.S., U.K., and Thailand, and is in the midst of discussions regarding the distribution of WWE content in India. The company estimates that it will increase the average annual value of these key television agreements to approximately $200 million, representing an increase of more than $90 million that is nearly three times the increase achieved in the previous round of negotiations.

The release had a clearly optimistic tone, and the company also provided a chart showing how the value of its content agreements has been materially rising over time:

Captura De Pantalla

Source: World Wrestling Entertainment.

This is a considerable increase in revenues and presumably also in profitability, since costs will most likely be relatively stable in comparison with revenues. 

However, it all comes down to the announcement versus expectations, and many investors were clearly expecting much more from the company. Other sport franchises have obtained big increases in licensing deals lately, and this may have fueled overly optimistic expectations regarding WWE.

Major League Soccer recently signed a new eight-year deal with ESPN, Fox Sports, and Univision for $90 million, more than four times the expiring deal. NASCAR, which has similar ratings to those of WWE, last year signed a new 10-year deal with NBC and Fox for $820 million a year, versus $560 million in the previous licensing deal. 

The big decline in World Wrestling Entertainment on Friday is clearly an indication that investors were disappointed by the new licensing deal, but that doesn't mean the business is deteriorating at all. From a financial point of view, though, things are quite uncertain.

Risk and opportunity
WWE co-founder and CEO Vince McMahon has made a series of aggressive maneuvers lately. The company has launched its online subscription video service called WWE Network, which provides access to new programs and a huge library of content for $9.99 a month. This also includes pay-per-view content such as the remarkably popular WrestleMania.

To compensate for the loss in pay-per-view and subscription video-on-demand because of cannibalization, management estimates that WWE Network would require between 1.3 million and 1.4 million subscribers. The company announced in April that it had 667,287 WWE Network subscribers, and management is confident of reaching 1 million subscribers by the end of 2014.

It's important to notice that the company would still be losing money if it reaches that goal by the end of the year. WWE estimates it will lose between $35 million and $45 million at the level of operating income before depreciation and amortization, or OIBDA, during 2014, and net loss for the year is expected to be between $45 million and $52 million.

Under a considerably ambitious forecast for 2015, management believes WWE can turn to profitability next year. If WWE achieves an average of 2 million to 2.5 million subscribers for 2015, OIBDA is expected to range from $125 million to $200 million, and 2015 net income is expected to be between $57 million and $105 million.

The company pays a quarterly dividend of $0.12 per share, which translates to a dividend yield of 4.3% at current levels. The sustainability of these payments will ultimately depend on the company's ability to generate positive cash flows over the next few years, but the dividend yield still shows that the entry price may be attractive if the company can consistently increase sales and profits in the medium term.

Foolish takeaway
World Wrestling Entertainment is a risky investment. Future returns will depend to a good degree on variables such as the company's ability to grow its WWE Network business, which means considerable uncertainty. On the other hand, even if it's below expectations, the new licensing agreement is much more lucrative than the previous one, and this is a strong positive indication when it comes to evaluating customer demand and long-term growth opportunities. WWE may be painfully down, but the fight isn't over yet.

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