up, wimps! World Wrestling is back!, by Michael Brush
- 1st July 2004
MSN Money - Company Focus)
at least that's the talk at the company that dominates
professional wrestling. It says new stars and global
expansion can grab audiences again.
long ago, many on Wall Street figured professional
wrestling -- as an investing idea, anyway -- was down
for the count.
however, the big-money, high-energy, low-brow world
of professional wrestling has picked itself back up
off the mat, and it's ready to deliver further gains
for wily investors willing to place a bet in this
big a win could be in store for shareholders of World
Wrestling Entertainment, the company that runs the
stock has already had a healthy run to $13.75 from
lows of around $8 at the start of last year. But thanks
to cost cutting, expansion of the brands at home and
abroad and a few other tricks, the stock could tack
on another 30% over the next year or so.
if World Wresting manages to groom captivating stars
as wildly popular as those from professional wrestling's
heyday a few years back -- The Rock and Stone Cold
Steve Austin come to mind -- the rewards could be
much greater for investors.
for people who hold this lightly-covered stock, it's
possible to follow all the twists and turns like you've
got a ringside seat. In part, because Wall Street
brokerage houses don't follow the stock, World Wrestling
posts key performance metrics -- like TV ratings,
pay-per-view sales and live event attendance -- right
on its Web site.
a closer look at one of the nation's most surprisingly
popular entertainment outlets.
Thanks to the loss of several major stars, World Wrestling
has spent much of the past two years looking like
a skinny guy who just got hammered by Stone Cold Steve
Austin's signature blow -- known to wrestling fans
as the Stone Cold Stunner.
cutbacks in appearances by big draws like The Rock
(he shifted his focus to making movies), Mick Foley,
Kevin Nash and Stone Cold himself (due to retirement
and injuries), professional wrestling lost much of
its pizzazz over the past few years.
2002, audiences -- and the take at live events --
were dwindling. Not surprisingly, two summers ago
shares of WWE itself looked shell-shocked. They fell
more than 50%, bottoming at $6.86. Then, it traded
at around $8 for the next six months.
last April -- just like the battered underdog who
comes back after being left for dead in a typical
WWE plot line -- the company climbed up off the mat.
The stock recently traded as high as $13.75. To be
sure, entertainment stocks generally are higher in
the last 12 months.
what? Does this unlikely Wall Street contender get
the girl, too?
driving up the shares of this little-followed stock
have some good reasons to think so. When the sport
and the company started to move out of favor two years
ago, management cooked up a few tactics to win back
fans. And it has a couple of secret weapons that will
we get to the battle plan, let's take a step back
for a brief primer on why fans are so drawn to professional
wrestling -- just in case you wonder how on earth
this campy sport could be so popular.
avid fan base
Skeptics of the sport's potential to captivate fans
should consider this: Weekly broadcasts of "Raw"
wrestling events are among the top-rated shows on
basic cable (excluding network programming).
night "SmackDown!" broadcasts are the highest-rated
show on the UPN broadcast network. And wrestler Steve
Austin's book, "Stone Cold Truth," even
broke into the top 10 on the New York Times bestseller
list for a time.
understand the popularity of this sport, we checked
in with a top professional wrestling star on the circuit
right now, Triple H, a character played by Paul Michael
LeVesque. In wrestling, Triple H is one of the baddest
of the bad. But in person, he is a gentleman with
the patience to explain professional wrestling to
the uninitiated, like me.
off, says Levesque, WWE is a big hit among fans because
plot lines and characters portray simple, Everyman
themes that strike a chord with WWE's young, male
fans. These include themes like getting the girl,
rebelling against authority, good vs. evil, settling
a score, comeuppance for the arrogant or getting one
over on a tyrannical boss. Just look at one of the
factors behind the success of Stone Cold Steve Austin.
Cold was the guy that looked at his boss, stuck his
middle finger up, and said 'I don't care if you are
my boss or not, screw you.'" says Levesque. "And
they fought. I think a lot of people would love to
do that. We are people's fantasy life, what they wish
they could do."
many levels, in other words, wrestling is a soap opera
for young males, who make up about two-thirds of the
there's the draw of the action, energy, music and
pyrotechnics at a live show. "When you go there
and there are 20,000 people yelling, you lose yourself
in the performance, and you find yourself cheering
and standing up in your seat," says Levesque.
"It is a very exciting and energetic performance
for two hours that doesn't let you down."
Livingston, the company's chief financial officer,
believes many fans follow the sport because their
parents and grandparents were fans, and enthusiasm
for wrestling gets passed down through generations.
truth be told, there is also a less innocent appeal.
Like many forms of entertainment that appeal to the
coveted young male demographic, WWE gets downright
lewd and crude to draw viewers. In a recent SmackDown!
event broadcast by UPN, wrestler John Cena taunted
his chubby nemesis with these rap lines: "You
better hit those sit ups, you're not the leanest.
Forget seeing me bro, you can't see your own . . ."
(Good taste suggests we should stop here.)
turn for the worse
Partly because of antics like these, WWE had a spell
of wild popularity earlier this decade. Annual revenue
peaked at $438 million in 2001, 2.5 million fans attended
live events, and eight million purchased pay per view
then the business, as they say in wresting, took a
fall. Attendance at live WWE shows declined to about
1.8 million in the company's 2003 fiscal year (which
ended last April). Domestic pay-per-view buys fell
to 5.3 million and net revenue declined to $374 million.
Earnings per share fell to 23 cents, from 90 cents
in 2001. (WWE gets about 36% of its revenue from TV
related sources, 25% from pay per view, and 19% each
from branded merchandise and live performances.)
though, things are looking up again for WWE. For the
first six months of its 2004 fiscal year (the six
months ending October 25), pay-per-view buys have
climbed back to 2.4 million, compared to 2.25 million
in the same period the year before. That's a 7% gain
-- vs. a 25% decline the year before. TV ratings have
stabilized. Only live attendance continues to decline.
But the increase in pay per view buys may signal a
turning point there soon, too.
company expects revenue of $325 million to $350 million
for the fiscal year ending in June. It projects earnings
before interest, depreciation and amortization --
or EBITDA, a measure of cash flow -- to rise around
30% to $55 million-to-$60 million this year. It was
$44 million last year. Earnings per share should more
than double to 45-to-48 cents.
how we get a potential 30% rise in the stock from
here. If you subtract the company's cash of around
$260 million from its market cap of $918 million,
investors are basically valuing the business at about
$658 million -- or around 11 times projected EBITDA
of $60 million. Media companies typically trade at
12 or 13 times EBITDA. If we assume 20% growth next
year, that suggests an EBITDA of $72 million next
year. Give that a 13 multiple and you get $936 million.
Add back the $260 million in cash and you get a projected
market cap of $1.2 billion. Divide that by 69 million
shares outstanding and you get a price target above
$17 in a year.
the potential for investors is greater if WWE grooms
upcoming talent into hot stars. Meanwhile, here's
how it will turn the business around.
loyal fans continue to support professional wrestling
for reasons like those, investors recently buying
WWE shares believe four factors will help broaden
the appeal of the sport, and propel profits and the
stock even higher.
expansion. Major sports such as baseball, football
and hockey have increased their fan base by expanding
the number of teams and leagues in recent years. Among
other benefits, this created more room for more stars
has done the same thing, creating two distinct "leagues,"
so to speak, in Raw and SmackDown! The two TV shows
-- one on cable and one on UPN -- used to be variations
on the same theme, running the same plot lines with
the same characters. Now they are two stand-alone
television brands, each with its own story lines,
characters and touring companies. This move has several
advantages for WWE.
it takes some of the pressure of the wrestlers, who
lead a tough life. Though many of their antics are
faked for show, they still hurt. And the characters
travel a lot. Triple H says he's on the road about
200 days a year. With two distinct troupes, WWE can
reach more cities with less wear and tear on the wrestlers.
the expansion leaves more room for new stars to develop.
"We got to the point where everyone loved seeing
The Rock and Stone Cold Steve Austin, but everyone
saw them all the time, and it was hard to bring up
new talent," says Gary Davis, a spokesperson
for WWE. "There is a greater potential for talent
to get exposure now that the split has occurred and
all the top talent is not being seen every time. Now
we have to develop new talent to fill that void."
or later, expanding the star base should help WWE
increase the number of lucrative pay-per-view events
it runs. Viewers typically pay $35 or more to watch
these events, which produce much higher profit margins
than live events. The company currently has about
12 pay-per-view events per year. But it hopes to expand
that to 14 in a year or two.
growth. Since its very basic themes transcend cultures,
it's no surprise that WWE is launching a drive into
new countries around the world. In WWE's fiscal 2004
(which started in April 2003), the company will have
about 30 events outside North America, up from 19
the prior year. But WWE is also expanding television
distribution agreements around the globe, from Asia
and Europe to Africa and Latin America.
video library. WWE wisely snapped up the old footage
from the likes of the American Wrestling Association,
WCW Wrestling and ECW Wrestling. WWE plans to repackage
the historic footage into DVDs, videos, and video-on-demand
offerings on cable. "We have a tape library of
25,000 hours," says Livingston. "We bought
out all the old wrestling federation tape libraries,
so we own the history." An early foray on this
front, resulting in a DVD set about Ric Flair (who
was popular in the 1980s), sold out in a month --
a sign that there's a taste for more footage from
also gets a piece of the action from the sales of
video games like "Wrestle Mania XIX" on
Game Cube, "Raw 2" on Xbox and "WWE
SmackDown! Here Comes the Pain" on PlayStation2.
These games often rank among the top sellers.
it recently started a film business. It has two movies
in development -- one based on Stone Cold Steve Austin
-- and it also plans an animation series, as well
as a live-action series on CBS starring Mick Foley.
talent cycle. Finally, insiders who have watched the
talent cycle ebb and flow over the years are confident
that new stars will crop up and bring back a bigger
fan base for live events. If so, that will spill over
into better sales for pay-per-view events, merchandise
and video games. "It is like a sports team that
is in the rebuilding mode," says Livingston.
"Everyone said there wouldn't be another Dr.
J, but then Michael Jordan came along. You don't know
exactly when it is going to happen, but over and over
and over again, it happens. They come back."
certainly have a big incentive to see that it does.
WWE chairman Vince McMahon plays the evil boss in
many WWE story lines. But in real life, his wife Linda
is the chief executive of the company. The McMahon
family owns 80% of the outstanding shares of the company.
(Institutions own another 11.6%.) That limits the
float -- which can contribute to volatility. And there's
the risk for investors that the McMahons cash out
big chunks of their holdings. On the other hand, that
big a stake assures investors that top management
has their interests at heart.
fact, if you buy the stock and you're not a big fan
of wrestling, WWE still makes it easy for you to track
company likes to say that three factors determine
the fate of profits: television ratings, pay-per-view
buys and live-event attendance. The company updates
these statistics weekly on its investor relations
the time of publication, Michael Brush did not own
or control shares in any of the companies listed in
Wrestling Entertainment corporate website