by Jonathan Berr | April 8, 2014 11:19 am
Shares of W0rld Wrestling Entertainment (WWE), the wrestling empire run by impresario Vince McMahon, have roared like Hulk Hogan, gaining more than 155% over the past year. Unfortunately, much like the sport, there was less to the the company than met the eye, and the company has taken a major hit in the past few days, including a 4% drop this morning.
The problems of WWE stock go beyond the hugely disappointing subscription numbers the company reported for its online-video service (667,827 versus expectations of 800,000). That’s well under the 1 million level analysts say is needed for WWE to make a profit on the service.
Those disappointing numbers only heightens investors’ unease about WWE, which is in the process of negotiating a new television deal. Comcast’s (CMSCA) USA and SyFy channels weren’t able to reach an agreement with WWE before an exclusivity window expired. WWE is still talking to the channels, though it now has the ability to talk to other parties as well.
WWE stock seems to be down for the count, falling more than 17% in less than a week. Odds are that the shares will continue to fall unless the company can find a tag-team partner in the form of one of the many giants in the media business. But that possibility is more likely than it might otherwise seem.
One of the issues holding up a sale may be McMahon, for whom the WWE is a family affair. McMahon’s daughter Stephanie McMahon Levesque is the company’s chief brand officer, and her husband, Paul Levesque (known as “Triple H”), is executive vice president for talent and live events.
Vince McMahon certainly has a high opinion of the product he is selling. According to media reports, he wants to get a TV rights deal similar to the 10-year, $8.2 billion deal that NASCAR recently signed because WWE programming outdelivered the audiences of NASCAR, Major League Baseball and the NHL.
However, I don’t think that’s an apples-to-apples comparison. Sports programming attracts premium prices because its one of the few genres of programming that is mostly watched live. Though performing in the WWE requires athletic prowess, it isn’t a sport (though McMahon may disagree). Basically, it’s a spandex soap opera for men.
And more trouble lies ahead for the WWE. As Thomson Reuters noted on its Alpha Now site, the quality earnings for WWE stock have been poor for some time. For instance, cash flow at the company was negative in each of the past five quarters and its allowance for bad debts has dropped for reasons that WWE has yet to explain.
Then there are WWE’s poor profit margins, which have plunged over the past three years to 4.1%, far below the 16.5 percent median average in the entertainment industry. To make matters worse, WWE stock gets about 75% of its revenue from the U.S. and hasn’t been able to make significant inroads outside the U.S. — a key market for entertainment companies.
And, perhaps worst of all, diehard fans seems to be losing interest in the WWE.
‘Batista’s return to the WWE has failed to capture the imagination of fans as The Rock’s return did,” blogger Patrick Michael recently wrote on Yahoo. ” Daniel Bryan’s legions of fans are not satisfied with his spot in the WWE. Many fans are tired of seeing John Cena and Randy Orton in the WWE title picture.”
With its digital strategy stymied, its overseas expansion delayed and its television future unclear, the best strategy for WWE to pursue is a sale to a larger rival. It has little choice. With a $1.6 billion market cap, WWE stock is a gnat amongst dinosaurs in the media world that have more than 100 times its market value.
WWE stock is also very expensive, trading at a price-to-earnings multiple topping 222. The average 52-week price target on WWE stock is $35.14, roughly 45 percent under where it recently traded.
But the tiny size of WWE might be its biggest advantage. The cost for one of the global media giants to buy out WWE would be pocket change, from their perspectives.
Comcast would seem to be the best fit with WWE stock, though Viacom (VIAB) could work as well, as would MSG Group, the parent of New York’s Madison Square Garden. Regardless of the buyer, McMahon likely would demand the same kind of autonomy that Pixar has in its arrangement with Disney.
“It’d be tough to take it out of the family’s hands unless they felt there was something so compelling or such a good strategic partnership opportunity,” said Kim Opiatowski, an analyst withy Vertical Group, in an interview with Bloomberg News.
Such a deal, though, may come sooner rather than later, so the time to buy WWE stock is now before a larger company tags into the ring and snaps it up.
Jonathan Berr fondly remembers Haystacks Calhoun and Chief Jay Strongbow and doesn’t own shares of the aforementioned stocks.
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