The WWE stock has been performing very well over the course of the last year. Since the second quarter in 2022 until the end of the first quarter in 2023, WWE shares are up 46,2 % compared to -9,3 % of the S&P 500. With the world opening after the pandemic and sporting rights reaching astronomical prices, there could be more leeway for WWE moving forward. Does it mean that it is time to add WWE to your portfolio? In this analysis, I will try to give the answer.
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
For full disclosure, I should mention that the time of writing this analysis, I do not own shares in WWE nor in any companies that could potentially buy the rights for their shows. If you want to copy the portfolio or want to see which stocks I hold, you can read how to do so here. As I have no skin in the game or any prior opinion when it comes to WWE, I believe it is relatively easy to keep the analysis unbiased.
WWE was founded in 1980 as Titan Sports, Inc in Massachusetts, United States. It was founded by Vince McMahon who was the CEO until July 2022, where he retired amid an ongoing investigation surrounding him paying money to several women who alleged sexual misconduct between 2006 and 2022. Vince McMahon continues to be the largest shareholder as he holds approximately 81 % of all shares in the company. WWE specializes in sports entertainment, in which they produce and distribute shows. The business is divided into three different segments: Media, Live Events, and Consumer Products. The Media segment reflects the production and monetization of video content across various platform and contributed with 85 % of the revenue in 2021. The Live Events segment revenues primarily consists of ticket sales and contributed with 5 % of the revenue in 2021. The Consumer Products segment revenues consists of royalties and licensee fees related to WWE branded products and contributed with 9 % of the revenue in 2021. With more than four decades in the sport entertainment industry and continued sold out events and increasing TV viewers, I believe that WWE has a brand moat.
Since the retirement of Vince McMahon in July 2022, WWE has had two co-CEO until Stephanie McMahon resigned in January 2023. Since then Nick Kahn has been been the sole CEO of WWE. He joined WWE as president and Chief Revenue Officer in 2020. He is a former practicing attorney but later transitioned to be an agent where he represented the biggest names in sports broadcasting. He later transitioned to negotiating deals for sport leagues and organizations as they should strike media agreements with TV networks and digital services, which is an experience that will be very useful in his new role. At WWE he has been recognized to be the reason for increasing margins, as he has negotiated new TV deals, while also slimming down personal. However, it has also made him a controversial figure in the wrestling community as he has been accused to have a cold-blooded view on the business. As management is this new, it is impossible to evaluate former results. Nonetheless, I think that Nick Kahn has in his previous roles have shown that he make the company more profitable, and I feel hopeful that management will do good moving forward.
I believe that WWE has a brand moat. There are some uncertainties regarding management but I'm willing to give them the benefit of the doubt. Now let us investigate the numbers to see, if WWE lives up to our requirements for a strong moat. In case you want an explanation about what the numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will investigate is the return on investment capital, also known as ROIC. We want to see 10 years of history and we want the numbers to be above 10 % in all years. WWE has delivered disappointing ROIC in the past and especially 2014 is disastrous. There are some mediocre numbers as well, but ROIC looks good since 2018 and moving forward. It is curious to see that WWE delivered a good ROIC in 2020 despite the pandemic. In 2021 they got their second highest ROIC despite the year being affected by the pandemic as well. ROIC decreased lightly in 2022 but considering how tumultuous that 2022 has been, I don't think it is concerning as the number is still in the same ballpark as 2021.
The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. The book value has had its up and down throughout the years, as we can see on the growth rate. I'm a bit surprised to see that 2020 was that good because of the pandemic. WWE did great in 2022 as they reached their highest number so far. which is encouraging.
Finally, we investigate the free cash flow. In short, free cash flow is the cash a company generates after it has paid for operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has left remaining after paying all of its financial obligations, I use the margin for it to make more sense. Free cash flow yield is the free cash flow per share a company is expected to earn against its market value per share. WWE only had one year with negative with negative free cash flow and it is many years ago. I see this as something positive. It is also nice to see that WWE has taken a step up in free cash flow since 2017, but I would like to see WWE delivering a higher free cash flow in 2022, where they have delivered a high levered free cash flow in evert year except for 2019. However, the 2022 numbers indicate that the shares are not cheap at the moment, but we will get back to that later.
Another important thing to investigate is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by earnings. Doing the calculation on WWE, I can see that WWE has 0,11 years earnings in debt. It is very encouraging, and debt is certainly not an issue if you are considering investing in WWE:
Based on my findings so far, I believe that WWE is an interesting company. However, no investments are without risk and WWE has some risks as well. One risk that management mentioned in their latest earnings call is macroeconomics. They mentioned that macroeconomics could potentially impact consumer spending. A slowdown in the economy could affect non-contractual areas of their business, such as live events and merchandise going forward. Furthermore, management admitted that they have already seen some pressure on expenses primarily related to labor, deliver cost of merchandise and diesel fuel. Hence, macroeconomics already affects costs and potentially sales moving forward, which could lead to less profits. Competition. While WWE is a clear leader when it comes to wrestling, they are facing a competition from other organizations in the sport entertainment industry. They compete with organizations such as NFL, NBA, and UFC, not only for viewers and life attendees but also on marketing sales. So far WWE has performed admirably over the course of decades but if consumer spending is tightening, consumers will need to choose which events to attend and what merchandise to buy. The new management. I wrote about management previously and while I feel confident and give management the benefits of the doubt, I still believe it should be considered a risk. In more than four decades of existing, WWE never had another CEO than founder Vince McMahon. It isn't your average CEO that retires but one that has built WWE to what it is today, and his tumultuous retirement could mean that no real succession plan was made prior to him leaving. Furthermore, WWE mentioned "the unexpected loss of service of Vince McMahon" as a risk in their latest annual report.
There are also plenty of potential for WWE in the future. One thing that could positive affect WWE moving forward is the high prices for media rights. In the latest earnings call, management mentioned how the marketplace for media rights has become more crowded, as interest from "deep-pocketed tech companies has never been higher". Management mentioned that companies like Netflix, Alphabet and Apple are now entering the live sport space. Management mentioned that newly acquired Formula One rights grew by a 16x multiple. Management expects these prices to continue to be inflated as there are no type of programming more valuable to sponsors than live sports. Hence, management believes that their media rights will generate significantly more profits the next time they get sold. International expansion. In their latest annual report, management mentioned that international markets will provide opportunities to further long-term growth platforms. Management believes that they can increase monetization of their content outside of the United States by localizing content and engaging fans directly in their markets with local talent. WWE is already very popular internationally as we have seen sold out arenas in Europe and the Middle East. Furthermore, WWE is now the second most popular sport in India, which could lead to solid profits, if they are able to increase monetization. New revenue streams. In the latest earnings call, management mentioned new revenue opportunities that they have gotten involved in. They made their first NFT collaboration in which all NFT's sold out in less than 24 hours, they introduced premium live events business on location in which sales exceeded expectations, and they introduced a ticketed live event experience of the Undertaker's deadMAN SHOW that sold out in 3 hours. These are just some of the new revenue streams that management has identified, and they expect to continue to identify new revenue streams moving forward.
All right, we have gone through the numbers, potential and risk regarding WWE, and now it is time for us to calculate a price for WWE. To calculate price, we will need the numbers that I have explained in the "MY STRATEGY" section of the website, as I do not want to go through the whole calculation here. I chose to use an EPS of 2,29 which is the number from 2022. I chose an Estimated future EPS growth rate of 11 (management expects EPS to grow at 11,2), Estimated future PE 22 (which the double of the growth rate, as the historically PE for WWE has been higher) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY" we come up with the sticker price (some call it fair value or intrinsic value) of $35,36, and we want to have a margin of safety on 50 % so we will divide it by 2, meaning that we want to buy WWE at price of $17,68 (or lower obviously), if we use the Margin of Safety price.
Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". To do so, we need some numbers from their financial statements, keep in mind that all numbers are in millions. The operating cash flow last year was 325,6 The Capital Expenditures was 199,9. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I couldn't find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 139,9 in our further calculations. The Tax Provision was 68,8. We have 74,416 outstanding shares. Hence, the calculation will be like this: (325,6 - 139,9 + 68,8) / 74,416 x 10 = $34,20 in TEN CAP price.
The last calculation is the PAYBACK TIME. I also described in "MY STRATEGY". With the Free Cash Flow Per Share at 1,69 and a growth rate of 11 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $13,56.
I believe that WWE is an interesting company. They have a strong brand moat and will probably get a much higher multiple on their media deal the next time around. Management is completely new and while they have vast experience in the industry, it is important to monitor their execution moving forward. The macroeconomic environment we are in could cause some headwinds for WWE in the short-term, but I'm not concerned in the long-term, as they have a unique position in the market. Management touched upon recession in the latest earnings call and mentioned that compared to the financial crisis in 2008 where 30 % of their business was contractual and 70 % were transactional, it has changed today where 70 % is contractual and 30 % transactional. Hence, the company should fare better this time around. Nonetheless, while it is an interesting company, I believe that the share is too expensive for the time being, and due to the uncertainty, I do want a 50 % discount on intrinsic value. Hence, I'm not interested in WWE unless it reaches the TEN CAP price at $34,20. One thing you should be aware of is that WWE has fielded offers for sale, and rumors have it that Vince McMahon wants to get up to $9 billion for the business. It is significantly higher than the current market cap that is below $7 billion as I write this. Thus, if you believe that WWE will be sold at that price, there are some upside to be found. Personally, I don't do speculations like that though.
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