Source: Steven Mallas of Motley Fool
World Wrestling Entertainment (NYSE: WWE) had one heck of a year. Don’t think of it as just a purveyor of ribald ‘rasslin rogues and convoluted soap operas for men. WWE wants to grow into a media powerhouse capable of competing with companies like Disney (NYSE: DIS), Time Warner (NYSE: TWX), and Viacom (NYSE: VIA). To that end, it has heavily promoted its home video business, enhanced a strategy to distribute thousands of content hours via subscription video-on-demand, and, most interesting to this Fool at least, released two movies starring actors tapped from its kayfabing repertory. Enter the ring with me as I take a look at how 2006 treated Vince McMahon’s empire.
Back in March, WWE reported a quarter as big as Triple H’s ego. Well, maybe not that big, but it was a good one nonetheless. For the fiscal third quarter, WWE saw revenues jump by over 24%, operating income increase by 67%, and net income rise by over 23%. Can’t get much better than that. Actually, come to think of it, you can, because net cash from operations soared dramatically, and free cash flowed supreme, funding a nifty little dividend for shareholders; at the time, the stock carried a 6% yield. Pay-per-views, home video operations, attendance at live events were rocking. And, best of all to me, a fan of the movie business, Kane’s horror film See No Evil was waiting to debut in a couple months, to be distributed by Lions Gate Entertainment (NYSE: LGF). Yep, life was good for WWE.
Then, when June rolled around, business softened a bit. The fourth quarter was almost a reverse of the statistical utopia I found in the previous earnings rumble — revenues, operating income, and net income all saw declines. I was quick to point out, however, that an alteration in the financial structure of the company’s advertising strategy, vis-a-vis its television operations, eliminated some revenue streams and had to be kept in mind. I also counseled shareholders to have a look at the great year-end numbers. Revenues, operating income, and net profit increased by 9%, 40%, and 20%, respectively. Free cash flow for the year jumped 400%, driven by the fact that the company didn’t book as much film investment. WWE also saw its subscription video-on-demand service WWE 24/7 hulk up, as revenues went from $0.1 million to $1.1 million — that’s important, because the monetization of its library of content is one key for long-term growth. Another key is the movie business, but the company couldn’t recognize any revenue yet from See No Evil, because the distributor would first have to recoup costs associated with opening the film (admittedly, it didn’t do as well as I had hoped).
At the beginning of September, I covered the first fiscal quarter. WWE’s performance was about as exciting as an Al Snow match (hey, don’t blame me, Mick Foley made me say that). From the top to the bottom line, everything was flat. And thanks to another round of film investment and content acquisition, WWE wasn’t able to generate any free cash flow — net cash from operations was pressured by an 89% decline. Pay-per-view results may have been dampened by the lack of an extra event, but Wrestlemania still proved that it’s a dominant brand in sports entertainment — its home-video release moved hundreds of thousands of units. Still, the stock had rallied 11% on the news since expectations were bested. While the quarter overall wasn’t a stellar one in terms of the numbers, I agreed with the market’s reaction and remained bullish on the company, mentioning the still tempting yield of the stock, and the need to remain patient on WWE’s film division — I did, however, think that a pullback on the share price would be welcome.
During the first week of December, Mr. McMahon was set to meet Mr. Market in another hardcore match — can you guess who won? If you said Mr. Market, then you don’t know Vince — the mercurial chairman took his opponent down. While the company grew the top line by 8%, operating income nosedived and earnings per share from continuing operations dropped from $0.17 to $0.15 (there were a few million dollars of legal benefits in the previous year’s comparable timeframe). But the WWE 24/7 project continued its gangbuster performance, while home video was up thanks to that legend of legends, Hulk Hogan, whose DVD anthology ran wild in the marketplace. Alas, I had to remark that the movie segment still wasn’t bearing any fruit, as a result of its inability to recognize revenues. Plus, John Cena’s film, The Marine, distributed by News Corp. (NYSE: NWS), unfortunately didn’t win the battle at the box office in its opening weekend. Nonetheless, I remained firm in my support of the movie division. The drop in free cash flow didn’t please me, especially in relation to the dividend, but the financial health of the company seemed intact.
WWE had a powerhouse year in many respects. It’s braving the stormy waters of the movie business, where the risk of failure is high, but it is also aggressively marketing its library via on-demand technologies. The stock didn’t have the best of all possible years, but investors are being paid to wait on this one.
So, what comes next? How will the stock do in the next year? Let’s see what the CAPS community thinks of WWE’s prospects.
Caps Rating 1 Star
Bulls
37
Bears
20
Bull Ratio
65%
Bear Ratio
35%
*As of 12/10/06.
I can see that the CAPS community is not necessarily completely enamored by the WWE investment thesis. While one CAPS member by the handle of mks76 called the stock “a great income investing play,” another member named jmacn22 declared, after mentioning some of the positives of the company, that “there still isn’t enough here that makes me believe this is a sustainable stock to beat the market.” And then there was a comment by dmasters01 that I liked a lot, since I am biased toward WWE’s movie ambitions: “Naturally expanding its business into films. Unlike the XFL, movies are a natural progression.” Right on, my fellow Fool!
WWE finished another year as a prime force in sports entertainment and should someday be a formidable foe in the Hollywood studio system. 2006 will be remembered for the baby steps the company took in this direction. Here’s to a royal rumble of a new year, Vince.
