The Case for WWE

Analyst Dan Kline explains what makes WWE so appealing and why the sports-rights bubble isn’t about to pop just yet.

Chris Hill
Chris Hill
Jan 15, 2019 at 10:00PM
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On this snow-capped episode of Market Foolery, host Chris Hill and Motley Fool contributor Dan Kline talk about some of the market's biggest news. lululemon athletica (NASDAQ:LULU) pops 8% on its quarterly report -- apparently, demand for hundred-dollar yoga pants isn't fading, and the company's move into menswear was a smart one. Shares of Gannett (NYSE:GCI) pop on reports of a takeover bid from MNG Enterprise, but fans of the company should brace for impact. Things look worse for shareholders of utility giant PG&E (NYSE:PCG), who just found out that the company is filing for bankruptcy protection. Tune in for some advice on moving forward when one of your companies goes under. Also, Dan explains why WWE (NYSE:WWE) is one of just four holdings in his portfolio, how wrestling came to the mainstream, why the sports bubble isn't right about to burst, and more.

A full transcript follows the video.

This video was recorded on Jan. 14, 2019.

Chris Hill: It's Monday, Jan. 14. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio today, from the sunny climes of southern Florida...

Dan Kline: [laughs] Yeah, this may not have been the week to visit.

Hill: He brought nearly a foot of snow with him. Dan Kline. Good to see you! Thanks for being here!

Kline: Nice to see you! And, I will point out, I am here because it's snowing and no one else is here. We have gone well down the bench into the bullpens here.

Hill: Longtime listeners of Industry Focus are familiar with your work. For those who might have missed it, here in Alexandria, we got 10 inches of snow over a 24-hour period. I knew it was serious when I was walking into the office this morning and right across the street from Fool headquarters was the local NBC affiliate, the Storm Team4-branded vehicle. I thought, "Boy, is Chuck Bell here?"

Kline: We're both from New England.

Hill: Yes.

Kline: This is a little silly. 

Hill: It is and it isn't! I mean, for New England, particularly northern New England, you've got the resources, you've got the salt, you've got the trucks. But around here, they don't have the resources.

Kline: There's, like, 3 inches of snow on the sidewalks, and people are flipping out. [laughs] I get it. West Palm Beach, where I live, it's 60 today. People are going to be in fur coats. 

Hill: That's true. Fortunately, the news never stops. We're going to talk media, we're going to talk energy, we'll talk entertainment. We're going to start with retail. 

lululemon athletica shares up 8% this morning. Lululemon raised guidance for the full fiscal year. This is a nice boost for the raise in the guidance. I think it's safe to assume that they had a good holiday quarter.

Kline: This shocked me. They had reported in early December, and the numbers were a little soft. This is a premium product. It's not really in line with who did well. Target, Walmart, those had good holiday seasons. If you walk into Target, there's a huge display of, they don't call it fake Lululemon, but Lalalarry or whatever their fake brand is. So this shows a real strength. The economy is pretty good, and people are willing to buy $70 yoga pants.

Hill: I was less surprised, but that's because I have young women in my house. In terms of what was on various Christmas wish lists and that sort of thing -- and, there's a Lululemon right here in Old Town, and over break, there was an excursion, all that sort of thing. Are you at all surprised -- not necessarily just by this, because I know you're surprised by this. There was a stretch of time where the success of Lululemon was talked about first with praise, then followed by "But I don't see how they keep this up. How big is the market $100 yoga pants?" And the track record of Lululemon over the past 10 years is pretty impressive.

Kline: I think they've moved beyond the trendy -- remember Vineyard Vines? Everybody had to have that shirt of the high school kids? They still have a little bit of that. They haven't fallen into the negative. Sometimes you get that backlash, where it becomes really not cool. That didn't happen, and that's because it's a quality product. I don't look like it, but I've done hundreds of yoga classes over the last few years. If someone is wearing cheap yoga pants, that's not great. 

For the actual yoga market, Lululemon is a really good product. I'm sure there are less pricey -- maybe Target's, maybe Amazon's -- but you don't know. And if it's the difference between your yoga pants being see-through or not, you might spend the extra money. So they've established that this brand is good, and I think that will transcend the up-and-down trendiness of the label.

Hill: And they've also done a good job of expanding the offerings for men. When they initially talked about "This is going to be a focus for us," I was one of those people saying, "Come on, really?" And it goes to what you said -- they make quality stuff.

Kline: I laughed, because as a man who does yoga, it's very challenging to figure out what to wear. You can't really wear sweatpants. You'll see guys show up in slacks. Nobody knows what to do.

So to be able to buy a quality pant, where you're not wearing a woman's outfit, you're wearing something made for men, they've really figured it out. They're answering a question that maybe the rest of the market didn't believe was being asked, but every guy in a yoga studio was asking.

Hill: Good for them. Let's move on to Gannett, the parent company of USA Today. Shares of Gannett up 20% on reports of a takeover bid by MNG Enterprises, a fund that includes the Denver Post, the San Jose Mercury News. They're talking $12 a share. Right now, when we walked in the studio, the stock was trading at $11.68, something like that. This seems like a takeover bid that is marked for success.

Kline: This is disturbing. I used to work for a company called the Journal Register Company, which was a predecessor of Digital First Media, which is owned by this hedge fund. As a fan of news, as people who produce a lot of content, these are people who come in and they don't just combine the back offices. If they were saying like, "We don't need the Denver Post and the Los Angeles whatever to both have CFOs," all right, maybe. No, no. They get rid of 40% of the news staff. And then, when, surprisingly, the audience doesn't like that, their answer isn't, "Let's hire some news people back." It's "Let's keep cutting."

So as a shareholder, be careful what you wish for. Yeah, you might get a slight premium on your stock, but you're going to lose your source of local news. There's a scorched-earth track record. To give you an example, the paper I worked at in Torrington, Connecticut, when I was the editor there, was understaffed at 18 full-time editorial staffers. There are three people in that room right now. 

Hard to run a newspaper. And yeah, some of the production was outsourced. But how can you cover the local news with three people in the newsroom?

Hill: Here in the D.C. area over the last 25 years, we've watched The Washington Post as a standalone public company shift its business focus to include educational services, that sort of thing. It's only when Jeff Bezos comes in and buys the paper and starts to invest in it, and it's removed from the public markets, that it begins to thrive. Although I should say, in terms of a publicly traded company, The New York Times over the last couple of years has done a good job in expanding its digital audience and rewarding shareholders.

Kline: You're seeing in other places, too. It's privately owned, but the Boston Globe, where I used to work. They decided, "It's a premium product; we're going to charge a premium price," and they're putting resources into the news people want. Hearst in Connecticut, buying up a bunch of newspapers and combining assets where it makes sense. It's fine to only have one UConn reporter covering women's basketball, not three. But nobody's going to buy USA Today or any of their local papers if they don't actually have reporters. And we're a partner. USA Today uses our content. So in some ways, them having less staff might be good for The Motley Fool. [laughs] But overall, you have to understand when you buy a newspaper, public or a share of stock, the returns have to be modest for the business to work.

Hill: PG&E is filing for bankruptcy because of the liability around the wildfires in California. Not surprisingly, shares of PG&E down 50% today. Again, this is not a surprise. I'm curious if you've ever found yourself in this situation. This is a question we've gotten before from not just investors in PG&E, but investors in a distressed business. You could look at Sears at any point over the last 12 months. What's your go-to move in that situation as an investor? Even though I've got a couple of stocks in my portfolio that are way down, they're not on the verge of bankruptcy or anything like that. I'm loath to sell them. I think if I were in this situation, I would look to cut my losses. 

Kline: First of all, if you're in this situation, forgive yourself. This isn't bad prognostication. This isn't you really believed Sears' strategy of doing absolutely nothing would turn their business around. This is liability in a disaster. Maybe, if you knew each member of management personally, you might have known, but there was no way. Let it go. 

Then, get out the best you can. Holding on to the stock... there's not going to be a turnaround. These assets will all be sold, because this company does need to still operate -- at least these services need to be provided.

Hill: It's a utility.

Kline: But three years from now, when they've figured it out, when the last PG&E desk chair is sold and there's a fund, the fund is not going to pay back stockholders. You don't want to be waiting to get your two cents on the dollar. Just get out. Call it a lesson learned. Hopefully, you have some gains to offset those losses.

Hill: Right. We were talking earlier, I was saying, "Gosh, if you're in this situation with PG&E, maybe one of the silver linings is the timing of it all." We're a couple of weeks into the year. If you're selling now, then you've got 11 months to look at your portfolio and think, "Is there something I want to sell at a gain? These losses will offset that, and I'm going to have a very attractive tax bill." And by very attractive, I mean, maybe you're paying nothing for capital gains.

Kline: You have to look on the bright side, because this isn't good for anybody.

Hill: I was looking at your portfolio -- not your actual portfolio, but everyone at The Motley Fool who's writing, who's producing content, all of our profiles are on fool.com, and our holdings are on there, so people at any moment can see what stocks we own. Two things stuck out to me about the stocks you own. One is, you own four stocks. I don't know that I necessarily had a number of my head, but I know it was higher than four. But what struck me was that, along with Apple and Microsoft, one of the stocks you own is WWE, which is one of those companies that we don't talk about very much on this show, to the chagrin of at least a couple of our listeners. I've gotten email and tweets over the last couple of years, where people are saying, "Hey, can you talk about WWE?" So I'm going to use this opportunity to say -- I'm sort of tempted to lead with, why do you own WWE? For those unfamiliar, what is the basic thumbnail sketch of the business of WWE?

Kline: WWE is a content company that has a sports-like -- they call it "sports entertainment" product. In terms of rights, it tracks like sports. It's very predictable. Ratings might inch up or down, but they're not going to plummet. They're not going to get canceled the way Disney could have a show on a rival network canceled and it impacts their bottom line.

Hill: Pro wrestling is not getting canceled, is what you're saying?

Kline: It has a core fan base. And for the past few years, they've largely been operating unopposed. That's changing a little bit now. There's some new money in it. Sinclair has a rival. Shad Khan, who owns the Jacksonville Jaguars, is starting a rival. There's a lot of money in sports rights. That's changing a little bit. But previously, their biggest negative was the stigma of pro wrestling fans. Nobody thinks of me or Industry Focus host Nick Sciple as the typical wrestling fan. Owns a house, has a little bit of money. No, they think redneck who only wants beer commercials. WWE has worked really hard to change that reputation, to move the product a little more mainstream, a little bit more PG. That's been rewarded by massive television rights deals. Because live sports, even live pretend sports, people watch them as they air. 

Hill: Wait, pro wrestling isn't real? 

Kline: I'm sorry to tell you. Now, of course, Hulk Hogan, totally real. But all the more recent pro wrestlers... [laughs] But it plays like a sport. Yes, the outcomes are predetermined, but you probably don't know them, even if you think you do and can guess it. If you're a fan, chances are, you have friends who are fans. It's just like, if I'm not going to watch the Patriots game yesterday -- my mother couldn't watch in real time. She had to send out a social media alert. "Don't text me about the game." She had to remember not to pick up her phone because it would appear on Facebook. Very similar with WWE.

Hill: Why couldn't she watch it in real time?

Kline: She had a tap-dance event. [laughs] My mother, a woman of many talents.

Hill: Oh, OK. I didn't know if she was in a place where it was blacked out or something.

Kline: No, no. 

Hill: There was a conflict.

Kline: She had people in her house that weren't football fans and couldn't watch. And I think, by the way, there should be an app that blocks all of your content, so you don't find out the score. But in terms of WWE, Monday Night Raw, people watch on Monday night. Tuesday night, which is moving to Friday night, on Fox (NASDAQ:FOX) (NASDAQ:FOXA), now on USA, moving to Fox, you have to watch those. So Fox is paying $1 billion over five years for a WWE live two-hour show that does half the ratings of the sitcoms that they air right now. The sitcoms that air do about 4 million people. SmackDown, on a Tuesday night, does 2 million. Moving to Fox, a little bit better than USA, but Friday night, a lot worse, ratings are probably going to go down, and they still think it's worth $1 billion over five years. Because that sitcom, you can skip through the commercials when you're watching it on DVR four days later.

Hill: $1 billion for wrestling over a five-year period, that sounds like a good deal for WWE and its shareholders. If you're a Fox shareholder, maybe you're scratching your head a little bit.

Kline: I like the deal for both companies. Though the piece that has hasn't really been talked about is, WWE in theory should be producing a lot of filler content for FS1, a lot of stuff that airs on their own network. One of the challenges they have is they created a streaming service because they didn't think this kind of TV deal was going to be there. They thought cord-cutting would happen a little faster, the stigma of wrestling might prevent them from getting big money. So they created a network that they were going to sell to their core audience. Thought they could get to 4 [million] or 5 million subscribers. They're only at about 1.8 million. It's a squishy number, because they do a lot of free trials. They had to stop pushing that, because now they have to push Fox and USA. Comcast and Fox are paying huge money. But five years from now, the cable universe may be very different. The only major caveat as a WWE shareholder is, if they can't get this kind of money again -- and we've never seen sports rights go down, so that's a big if -- but the cable universe, the TV universe could be very fractured by then. And then you're going to have a wounded WWE losing almost $2 billion over five years in revenue, and they're probably not going to pick up 3 million subscribers to their network. 

Hill: I'm glad you mentioned sports rights. We can close on this. As you indicated, we've seen sports television rights come up for the major sports here in the United States, even smaller sports as well. The price tag keeps going up, which leads to some people saying this is a bubble, it's going to burst at some point, there's no way this is sustainable. Where do you come down on this? Whether it's the NFL, the NBA, Major League Baseball?

Kline: All you need is two bidders. Right now, when the NFL rights come up, that won't be an issue. NBA, baseball, they benefit from the fact that you have DAZN, which is a pure streaming service; you have ESPN+ looking for pure digital content. The challenge with that -- and you're seeing it with UFC, ultimate fighting, mixed martial arts, whoever you want to look at -- they took what used to be free content on FS1 that lured you into the product, got you to buy the pay-per-view, and they're putting it on a paid service on ESPN+. They're getting a lot more money, but they're going to expose a lot less fans. So you wonder if at some point, there's a bubble for some of that. 

But if you're the NHL, a much lesser league in terms of rights, you're going to be able to say, "Hey, Yahoo! is willing to pay twice as much as NBC or ESPN." And maybe you're not actually willing to go to Yahoo! yet, but you'll get a little bit more out of NBC and ESPN. I think we've got at least one more round of escalating rights.

Hill: Dan Kline, thank you so much for making the trip!

Kline: Thanks for having me!

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow!