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WWE: Get in the ring!
Stock Spotlight: the company has a choke hold on wrestling fans -- and some conservative investors.
May 20, 2005: 12:46 PM EDT
By Katie Benner, CNN/Money staff writer
Can the company's stock fly as high as its wrestlers?
Can the company's stock fly as high as its wrestlers?
Pinned to the mat: Shares of WWE have not done well since the company went public in 1999.
Pinned to the mat: Shares of WWE have not done well since the company went public in 1999.
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NEW YORK (CNN/Money) - Where on Wall Street can you get dropkicked, clotheslined and paid a dividend which yields more than most Treasury bonds? Why, with shares of World Wrestling Entertainment, of course.

Strange as it may sound, the company that banks on large men wearing spandex, and being covered with body oil, may be a safe investment in these tumultuous times in the market.

WWE (Research) has practically no debt, a big pile of cash, a stranglehold on a niche market and an annual dividend yield of about 4.5 percent.

"It's a conservative investment, despite the flamboyant nature of the business," said Robert Routh, an analyst with Jefferies & Co. Despite some worries that's the business is a fad, he added, "Pro-wrestling isn't going anywhere."

With all that, though, the stock's gotten body slammed in recent years. At around $10.50, the stock is down some 60 percent from when the company, then known as the WWF, went public in 1999. (Its IPO was the same day as that of Martha Stewart Living Omnimedia. How's that for a study in contrasts?)

Moreover, Wall Street doesn't have high hopes for WWE for the fiscal year ending April 2006. Analysts, on average, have slashed their earnings estimates 28 percent over the past three months, from 61 cents a share for the year to 44 cents.

So is WWE down for the count or can the company come back and put a leg lock on bearish investors?


Why the sudden cut in forecasts? Look no further than the company's flagship show "Raw."

WWE said last month that the show will return this October to the USA cable network, where it was much more popular than it's been since moving to Spike TV in September 2000.

But the new deal with USA is less favorable for WWE. The cable network will keep all TV advertising revenue for "Raw," whereas at Spike, WWE retained all ad rights. To reflect the expected drop in ad revenue, analysts slashed their profit forecasts.

Dennis McAlpine, an independent media and entertainment analyst, estimates WWE generated about $37 million in ad sales from Spike during the fiscal year ended last month, about 10 percent of total revenues. And McAlpine said about $13 million of that total flowed to the bottom line, profits equal to 18 cents a share.

Analysts said increased exposure on USA could make up for the loss, since more viewers should lead to more attendance at live events, more pay-per-view customers and more merchandise sales. Pay-per-view (PPV) events, in particular, are a big sales generator for WWE but revenues have been sluggish from this part of the business.

What the WWE really needs is a big new star to reel in viewers and spark a trickle-down effect. "The Rock did tremendous things for the company because he brought in people who didn't even like wrestling, much like Hulk Hogan before him," said McAlpine. "When WWE gets its star, the stock will start to rise again. And they've never had a problem finding a star."

Fighting form

While the company tries to find the next "Rowdy" Roddy Piper or Andre the Giant to boost network ratings and PPV sales, it's turning to video-on-demand in a bid to smooth revenue peaks and valleys.

And with about 75,000 hours of wrestling footage on tape, WWE is hopeful there's a hungry audience nostalgic to pay to see Jesse "the Body" Ventura chicken-winging Tony Atlas. If the company successfully creates steadier viewer interest, some say WWE could even create enough demand for its own cable channel.

In the meantime, WWE's thriving international business could fill the gap before video-on-demand takes off, a process that analysts say could take about 18 months to bear fruit.

Live events are selling out in international markets, especially in Europe and Australia; fans abroad are spending about twice as much on merchandise at matches as their American counterparts. And Jefferies' Routh thinks there's more room to grow overseas.

"If anything, you could say they're expanding pretty slowly into international markets," said Routh. "They're financially a very conservative company. But now they're ready to dive in overseas."

But skyrocketing international business won't boost profits forever. At some point, attendance is likely to drop off as pro wrestling becomes less exotic and the markets become saturated with merchandise.

Champs or chumps?

Even though WWE wrestlers take high-stakes chances, the stock seems a conservative buy for longer-term investors.

James Clement, an analyst with Sidoti & Co., said he's a bit more skeptical than other analysts about how successful the company's video-on-demand pitch will be. But even he said the healthy dividend helped mitigate some of the stock's risk as investors get paid to wait for a profit turnaround.

Still, the stock seems pricey. It trades at a relatively high P/E ratio of 24 times WWE's estimated earnings for fiscal 2006. But if you take out the company's pile of cash, the P/E falls to about 15.4, a shade below the 15.7 the S&P 500 is trading at, using 2006 estimates.

Analysts said this is more than reasonable given that the company pretty much has a monopoly. "It would be too capital intensive for anyone to recreate what WWE has," said Routh.

With all this in mind, investors shouldn't wrestle too much with a decision about whether to buy the stock: WWE looks like a champ.

Jefferies' Routh owns shares of WWE; his firm does not have an investment banking relationship with the company. Other analysts quoted in this story do not own the stock and their firms have not done banking for the company.

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