Jonathan Heller's post on WWE appeared yesterday on RealMoney. Click here for a free trial, and enjoy incisive commentary all day, every day.
At times I've come across companies that I'm simply not apt to invest in because of the business they're in.
World Wrestling Entertainment
was one such company.
I'm not into professional wrestling, never have been, and probably never will be. I've never understood the draw, or believed it would have staying power. But I may have erred here, underestimating both the company and the loyalty of the fan base, because this is one solid concern that has built an incredible franchise. Its recent results, representing business done in the midst of a recession, were quite stellar.
WWE's revenue stream comes from multiple channels. About two thirds derive from the live and televised events the company produces around the world. Another quarter comes from magazines and DVDs. Two smaller segments, WWE studios and Digital Media, covering film production and the WWE Website, respectively, account for slightly more than 10% of revenue. While the film business has been difficult for WWE, the Website (WWE.com) averaged 13.4 million unique visitors a month, 285 million page views, and 18 million video streams during the third quarter.
Overall, the latest results were impressive, and demonstrate (to me, anyway) that this isn't the epitome of a cyclical business that I always believed it to be. While revenue increased 2% to $111 million, net income jumped 68% to $8.9 million, and EBITDA increased 62% to $18.1 million. The company beat the consensus estimate of 9 ½ cents a share by 26%, earning 12 cents a share. For the nine months ended Sept. 30, revenue did fall 11% to about $358 million, but its net rose 23% to $39.1 million, representing a 10.9% net profit margin. Not bad for a recession.
The key driver for WWE was cost control, primarily in TV production and marketing. In fact, its third-quarter gross margin improved by 7.2 percentage points over the same period a year earlier to 46.3%. Meanwhile, its balance sheet is solid, ending the third quarter with nearly $206 million -- $152.7 million in cash and $53.1 million in short-term investments -- or about $2.80 per share. Its debt is miniscule at $4.2 million.
One thing to be aware of: WWE operates under a dual share-class structure. The McMahon family owns most of the Class A shares with voting rights and calls the shots. But the family has done an excellent job of navigating WWE through some very rough waters. For his part, CEO Vince McMahon recently targeted average annual earnings growth of between 15% and 20% from 2009-2012. Now, of course, McMahon is bullish -- what CEO isn't -- but actually stating such a positive forecast is risky if the company can't deliver. I admire his boldness and, given WWE's cost-cutting steps along with future prospects, I believe such growth is plausible.
Another interesting feature of WWE is the lofty dividend, currently 36 cents per share per quarter, for a 9.4% yield. There is some concern the company won't be able to maintain it, but given its ample cash and growth prospects, the dividend could remain intact.
To that end, McMahon is focused on developing a WWE channel or network, the prospect of which might provide nice growth opportunities. WWE also recently signed a toy-licensing agreement with Mattel, arguably the 800-pound gorilla in the toy industry. Finally, international opportunities also abound, as is evident in the 38% growth in third-quarter average event attendance in international markets.
WWE currently trades at about 21.5 times trailing earnings, and 19.5 times consensus estimates for 2010. While that doesn't appear to be cheap, it's still well under the company's five-year average P/E of about 25. Even at 20 times the current 2011 consensus estimate of 93 cents a share -- which may be on the low side -- this is a $19 stock, 25% above current levels. Factoring in the dividend -- assuming it stays intact -- this is an interesting total-return play for uncertain times.
At the time of publication, Heller held no position in the stock mentioned.
Jonathan Heller, CFA, is president of KEJ Financial Advisors, a fee-only financial planning he recently launched. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.
Jon is also the founder of the
, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.