Is This Entertainment Stock in Deep Value Territory?

Shares of one of the purest plays in sports entertainment have been cut in half over the last few months, but for long-term investors this might be a very enticing buying opportunity.

Jun 3, 2014 at 11:54AM

Shares of World Wrestling Entertainment (NYSE:WWE) were slammed recently. The company dropped from a share price of $20 all the way down to around $11--roughly a 45% drop. CEO Vince McMahon lost $350 million in stock value.

The large and sudden drop was due to unfavorable news. Part of the downfall came with the news of the new television deal to keep the company's flagship programs, Raw and Smackdown, on NBCUniversal. The new deal was for $150 million, which is about one-half to one-third of what analysts expected.

The other part of WWE's downfall came as the company posted results for its new streaming service. Since its debut in February, the service has reached a total of 700,000 subscriptions. This number was much lower than expected, and further drove the stock price down.

Sizing up the competition
Despite the bad news, WWE lacks direct competition. It is far and away the most recognizable, if not the only, company that provides "sports entertainment." However, since WWE is considered to be in the entertainment industry, it has sizable competition in Disney (NYSE:DIS)and Time Warner (NYSE:TWX). Disney is a diversified company that has made some excellent deals as of late. The movies that Disney produces have been nothing but amazing at the box office.

The animated movie Frozen just passed $1 billion in gross earnings and dethroned Toy Story 3, which made it the all-time highest-grossing animated film. In addition, Disney seems like it can do no wrong with the Marvel franchise as each movie seems to increase in quality and popularity. With its newest movie, Guardians of the Galaxy, ready for release, it can only expect this trend to continue.

The other key for investors looking at the sports entertainment space is that Disney owns ESPN. The sports brand is said to be worth nearly $50 billion--that's roughly a third of Disney's market cap. The network also offers something for everyone, broadcasting nearly ever sport imaginable. Just as WWE is launching its own streaming service, Disney is dabbling in the a la carte market, and is said to be exploring the notion of offering Major League Soccer games online and outside of its current pay-TV service. 

The competition and dividend
Per the most recent earnings report, WWE has an EPS of -$0.11 per share. This was very disappointing, as the company has had a history of generating impressive earnings. Disney, on the other hand, had sizable EPS of $3.90 last quarter, and Time Warner had the highest of the three at $4.34.

All three of these stocks offer dividends. Time Warner has the highest payout at $1.27, with a dividend yield of 1.8%. Disney is very close behind with a dividend rate of $0.86, and a yield of 1.03%. On the heels of the news, WWE's dividend yield jumped to the highest of the three at 4.30% with a payout of $0.48 per share. The sector average dividend yield is 2.4%.

It should be noted, however, that a higher yield may not always be sustainable for a company with negative EPS. If WWE is not able to turn some of the losses around, it may cut its dividend. However, based on next year's earnings estimates, the dividend payout ratio is only 62%. Given that the company has over $57 million in net cash, it appears to be in a fairly solid financial position.

By the numbers
Given that WWE has a reported loss, the company's price to earnings ratio is incalculable. However, based on next year's earnings estimates, WWE trades at a P/E ratio of 15.5. Meanwhile, the company's historical average P/E ratio is around 20. WWE also trades at a P/S ratio of only 1.7, while its five-year average is around 2.

Disney's current P/E ratio of 21.37 seems right in line with the industry ratio of 20.88. More interestingly, there may be a play available with Time Warner. Considering the company's P/E ratio of 16.08, it seems as if there is room for the price to grow as it might be slightly undervalued compared to the industry. If Time Warner's P/E ratio rose to the industry level, keeping earnings the same, the stock would have a price in the mid $90's. This would equate to nearly a 35% increase.

The bottom line
Some investors look for bad news within a company to drive the stock price down. Once that happens, they will buy and hold, waiting for the price to rebound for hefty profits. This is like trying to catch a falling knife. However, it is also a strategy known as value investing that many of the investing greats employ. For investors who are looking for a company with a proven track record, both Disney and Time Warner are worth closer looks. However, investors who are looking for a deep value investment should have a look at WWE.

Your cable company is scared, but you can get rich
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Marshall Hargrave owns shares of WWE. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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