World Wrestling Entertainment
Five bad years
Before we chest-thump the recent positives to see whether they're sustainable, let's look at the past five years. From 2001 to 2005, WWE managed to drag revenues down from $438 million to $366 million. Pay-per-view revenues, where WWE was supposed to have a headlock on its fans, dropped 33%. Licensing revenues, its profit-pumping engine, thudded 22%, even as broadcasting rights stemmed the fall in TV advertising.
This slump occurred despite WWE successfully knocking its meanest foes, ECW (Extreme Championship Wrestling) and WCW (World Championship Wrestling), out of the ring, and spitting on the new bully UFC (Ultimate Fighting Championship). Instead of hunkering down, WWE expanded the number of annual events in these five years from 212 to 325. But the average revenue per event dropped from $386,000 to $242,000. WWE was committing the financial hara-kiri of opening new stores even as comps were declining.
But three key factors have changed over the last nine months. In my opinion, they could continue to drive earnings and mitigate some of the cyclicality of WWE's business.
WWE switched from Viacom's
Two other factors could also help WWE: It has the right to broadcast two additional shows on NBC on Saturday nights, something which it wasn't getting at SpikeTV's parent CBS, and USA gets into more households than SpikeTV does.
Estimates for RAW's viewers at USA have ranged from 5 million to 5.5 million, about 20% higher than viewership at SpikeTV. Nielsen ratings have moved from a 3.6 in January 2005 to a 4 in March 2006.
Additionally, fewer live events translated into roughly 18% higher average attendance per event.
The WWE has pursued international growth with a vengeance, and the numbers show it. Broadcast rights from international programs climbed an impressive 73%, with overall revenues rising 64% in the first nine months of the company's most recent fiscal year. However, I wouldn't expect to keep seeing such high growth rates as the WWE catches on in the U.K., Europe, and Japan -- three markets which have hosted the majority of live events. Even in fiscal 2005, total international revenues had increased by almost 40%.
Branded merchandise sales
Branded merchandise and licensing revenues jumped from $59 million to $96 million in the first nine months of the fiscal year, and most of that goes to the bottom line. Operating margins in branded revenues were a whopping 55%.
A bit expensive
At 22 times trailing earnings, aren't we overpaying for a company that had zero growth for five years? This product hardly lacks substitutes. Even if WWE has little competition in wrestling, it fights with sports and entertainment channels for the same young male audiences. Interestingly, WWE actually thrived under more competition -- in the good old days, before NITRO became WWE's lunch, audiences took sides between NITRO and RAW as fight nights thrived under wild accusations, finger-jabbing, leaked results, and even a kidnapping. With just 1.9 million competing viewers for UFC's Ultimate Fight Night on Spike, Monday nights aren't quite as manic anymore.
While the last nine months have been pretty fantastic, predicting that audiences will stay constant is an impossible task, and at some point it's going to weigh on valuations. In companies such as these, where earnings can be squeezed by weak content, I'd constantly be looking over my shoulder for P/Es that exceed growth rates.
. But worth it
However, despite these negatives, the average wrestling fan's loyalty keeps me invested in the mayhem. Even in WWE's worst period, when live attendance dropped from 2.4 million in 2001 to 1.6 million in 2005, the average spending per attendee increased from $33.40 to $48.70. To me, that's a huge margin of safety; I don't see this company losing money even in bad years.
WWE's business also enjoys solid margins, and even in bad times, 50% of licensing revenues go to operating profits. Even in 2003, WWE's worst year to date, operating expenses of $99 million only consumed 26% of revenues, indicating that you don't need a huge fixed overhead to run this business.
And in good years, like the one we're seeing now, additional expenses on events, publicity, and show nights lead to huge bump-ups in sales of merchandise and DVDs, which add few incremental costs to the bottom line. That's the beauty of this business: 16% revenue growth led to a 67% increase in net profit.
In addition, it has negligible debt and $277 million in cash, which is about 24% of its market cap. This is a cash-rich business, and aside from the $34 million spent on its movies over the last few years -- which fellow Fool Steven Mallas believes are big winners -- WWE spends less than 20% of its operating cash on capex in the average year.
I bought the stock a little late, around $16, but I think it's going to be one bone-crushing, foot-stomping, market-smashing investment over the next three years.
Can you smell what the Fool is cookin'?