World Wrestling Entertainment’s (WWE) brand, while niche, is most definitely iconic. Many grew up watching its captivating wrestling matches, and even those who didn’t really convert to seasonal fans are familiar with the company’s brands and namesake shows of Raw and SmackDown.
While the company has been consistently evolving over the years, retaining a loyal audience to its entertainment shows, shares had failed to deliver any tangible shareholder value for nearly two decades.
Source: Google Finance
WWE’s CEO and Chairman of the Board, Mr. Vince McMahon, owns around 34% of the total shares outstanding, with his class B shares boosting his voting power to nearly 80%. With him and his family controlling pretty much everything regarding the company’s future, outside shareholders have no say on WWE’s future operations.
On the one hand, Mr. McMahon and his family are specialists in maximizing professional wrestling’s entertainment value. They effectively created and commercialized the industry first-hand. If someone knows how to run the business, it’s them. On the other hand, shareholder value creation not being of priority held the stock in the shadows for years, with little investor interest.
Over the past few years, however, WWE saw its shares skyrocket, as its successful transition towards a content subscription service has finally opened new avenues for common stockholders to see value amid growing financials.
Q3 results – Strong media revenues despite the challenges
Just as WWE’s revenues had started expanding, COVID-19 occurred, which has adversely impacted the majority of companies involved in the “live entertainment” business amongst the other industries. Thankfully, the WWE network has grown enough that subscription revenues have helped improve its media segment, sustaining the company profitable for every single of this year’s quarters, despite suffering from the slump in live audience attendance.
Source: Q3 Presentation
As you can see, live events revenues were effectively nullified. However, media revenues grew by 38%, primarily driven by the growth of domestic core content rights fees for WWE’s flagship programs Raw & SmackDown. Additionally, the WWE network saw subscriber growth of 6% to 1.6 million paying members.
In our view, this is the most significant outcome of WWE’s latest report. With fans missing from WWE’s arenas, transforming the show’s previously electrifying atmosphere into a rather awkward one, one would think that fans would lose interest in the show. Special Pay-Per-View shows that would historically spark the fans’ enthusiasm ended up canceled or postponed, so such a case would not be unexpected. However, as media revenues have been surging and subscriber growth reassures the fans’ loyalty to the brand despite the watered-down content, we reconsider WWE’s investment case.
This is also reaffirmed from the company’s consumer products segment. Even though venue merchandise was lost completely, WWE shop’s sales surging and licensing revenues increasing is a massively positive result in regards to the company’s trademark, displaying a fantastic brand resilience.
Source: Q3 Presentation
If WWE’s brand is able to survive such adverse conditions and remain relevant with audienceless performances, it can survive anything.
Capital returns, Valuation, Investor returns
WWE’s historical capital returns have been through dividends. After slashing its DPS from $0.36 to $0.12 in 2011, the company has been paying out the exact same quarterly amount for nearly a decade.
Additionally, since the company’s profitability has been improving over the past few years, management has been executing quite significant buybacks. For example, the company bought back around $100M worth of shares during 2019. That didn’t end up too well, as the stock’s average price during the year was nearly double what it is now, potentially damaging shareholder value by management overpaying. However, it’s understandable. No one could have predicted COVID-19. What we focus on is the company’s intention to execute considerable buybacks, which could finally be another ingredient to total investor returns apart from its mostly underwhelming dividend.
During 2018-2019, the company’s valuation had skyrocketed due to unreasonable investor expectations. Now that shares have declined by nearly 60% from their 2018 highs, while profitability has remained robust, WWE is trading at a forwarding P/E of around 27, which could be potentially proven a value territory considering its recurring revenues and strong brand resiliency.
Analyst estimates for the company’s forward EPS have declined considerably post COVID-19, as growth could have been much greater if it wasn’t for the pandemic.
Still, analyst estimates remain at the annualized rate of around 10%. We believe that this is pretty reasonable. Considering the significant expansion in WWE profitability despite the ongoing pandemic, the combination of buybacks (paused but remain active), and organic growth in its WWE network platform, such EPS growth estimates are mostly reasonable.
Source: Seeking Alpha
To be prudent, we will estimate an EPS CAGR of around 8% going forward since we cannot fully rely on buybacks to materialize, as it is a relatively new capital allocation plan for the company. The pandemic has shaken the industry up, and management may choose to find more lucrative avenues. Additionally, we expect dividends to remain stagnant, as they have done for nearly a decade. Management retained the same DPS even during the past couple of years with surging profits and has shown no intention towards any increase whatsoever.
Combing our EPS & DPS projections, the stock’s current price of $40.97, and a reasonable range of potential valuations, we get the following results:
As you can see, at a reasonable multiple of around 23-25X its net income, we expect shares to deliver returns in the high-single to low-double digits.
In our view, WWE’s brand has displayed robust resiliency, posting strong media and merchandise growth despite the fact that COVID-19 could easily damage the company due to the live-performance nature of its business model. While shares have tanked due to previously being too overpriced and expectations dissolving amid COVID-19, the underlying financials continue to be improving.
Applying reasonable growth metrics and a slight valuation contraction to be extra prudent, we can see shares delivering sufficient returns in the medium term. These figures could even end up being higher if revenues accelerate post-COVID-19 as fans rush to fill WWE’s arenas every week.
Still, several risks remain, with the most prominent being the company’s lack of historical focus on shareholder value creation and WWE’s concentrated shareholder structure, which may not always align shareholders’ and management’s interests.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.