World Wrestling Entertainment: You Can't See Its Chokeslam On Recovery

Summary

• World Wrestling Entertainment's annual report shows growth still achieved, but quarterly numbers are shaky.
• A large portion of liabilities are held in Current Liabilities; how the company deals with it is an area to watch in 2021.
• Dividends will be paid out for 2021 Q1, with the company continuing a long streak of pay-outs. Questions remain on dividend growth. The P/E ratio shows mixed signals.
• 2020 Q4 numbers are down quarter on quarter. Thus, investors should watch how the company proceeds to take opportunities and challenges in 2021.

World Wrestling Entertainment (NYSE:WWE), a brand more known and loved around the world simply as WWE, is a long-running company in the entertainment sector that started in 1982 and which operates multiple wrestling events primarily in the United States, but also in international venues. They also manage the global broadcasting and commercial promotion and rights for these events, engaging in partnerships with television companies to deliver wrestling content to its consumers. WWE is famous for its events such as its signatures Smackdown and WrestleMania, as well as its gimmicky entertainment options (including “The Battle of the Billionaires” in 2007, which pitted then-civilian businessman Donald Trump against the company’s boss Vince McMahon). Its personalities also play a huge role in promoting the company brand and in pushing its visibility into mainstream society and in the non-captive audience for wrestling. Famous names to come out of the WWE stable include Steve Austin (known as Stone Cold), Fast and The Furious superstar Dwayne Johnson (previously made famous as The Rock in his time with WWE), and other charismatic figures such as The Undertaker, John Cena, Hulk Hogan, among others.

As an entertainment company with a global and digital footprint, WWE has shown relative growth in revenue and income for the last four years although some concerns about its cash and borrowings must be noted as well. Meanwhile, a short look at the revenue numbers also shows despite the growth in net income for 2016-2019, the measure showed some cooling-off in 2019 after a blockbuster 2018 with a 22.62 per cent in net income, from a 205.11 per cent gain in the previous year. Given these, the company is continuing to explore its expansion options. A Bloomberg report in 2019 reported that WWE enhanced its footprint in Saudi Arabia through a deal with Saudi Arabia’s General Entertainment Authority to add one more event to the single one it already holds in the country.

Company Financials

Income Statement

As a company that includes live event operations in its revenue stream, WWE had been (and is still) exposed to the impacts of the COVID-19 pandemic to the live events section of the entertainment industry. Due to lockdown rules and regulations, wrestling events which it usually holds in huge capacity arenas and which involve a congregation of a large number of the audience were made non-viable and thus necessitating the need for the company to be creative and flexible. Nonetheless, it had been possible for sporting events to be continued in 2020, given that the relevant health protocols were followed and that live audience presence was reduced or absent. Thus, WWE events from March 2020 onwards were held behind closed doors at Orlando, Florida’s Amway Center, its Performance Center in the same city, and more recently in nearby Tampa. What this means is that the company continued to deliver a product to consumers globally even with the lockdowns via both its streaming service WWE Network and through television.

Despite the reduced income stream coming from live attendance at its events, WWE generated an increase of 1.43 per cent in its annual revenue for 2020. This contributed to a 71 per cent increase in annual net income to $131.77mn, from 2019’s $77.06mn, which was also bolstered by a 12.38 per cent decrease in the cost of goods sold, from 2019’s $670.09mn to 2020’s 587.14mn. In terms of the annual numbers, overall the increase in net income was brought about by a decrease in the firm’s expenses which, despite the modest gains in revenues, pushed income even higher. Basic EPS was at an annual 1.7, a remarkable gain from 0.99 in 2019.

Taken from MarketWatch

Every quarter, however, while revenue in the last quarter of 2020 was the first to record again after three downward trending revenues in the first three quarters of the year, expenses rose at a higher rate in the same quarter. Cost of goods sold rose by 32.08 per cent, while Selling, General & Administrative Expenses were higher by 21.34 per cent, but revenue only increased by 7.49 per cent (around $17mn, vs a rise of $38mn in cost of goods sold). Net income in 2020 Q2 and Q3 both recorded gains quarter-on-quarter, but Q4 of the same year only recorded a net income of $13.6mn, a 71.83 per cent decrease in net income from $48.28mn. This shows the impact not just of the huge impact of the absence of a live audience, but also the impact that lesser events had on the revenue of WWE. Its report indicated the inability to hold an event in Saudi Arabia in the last three quarters of 2020 as a part of the deal with the government, representing a handicap in its roster of revenue-generating events. As a result, quarterly EPS floundered from 0.62 in 2020 Q3 to only 0.17 in 2020 Q4. Looking at the numbers and the statement, WWE had to move all its equipment used for its events from Amway Center to a different venue in Tampa in 2020 4Q, likely contributing to the higher expenses it incurred. It needs to stabilise its costs and improve its revenue, even though it has limited ability to conduct more events to add to its current roster. Indicated in its report was a line regarding the increase in WWE Network’s paid subscribers, so this could be a revenue stream that can help boost its income. Managing to succeed on this front will make the company continue on its recovery path.

Taken from MarketWatch

Balance Sheet

The annual picture is looking similar to the Income Statement, wherein there is growth in certain areas of the business. Cash held by the company was increased year-on-year massively from $90.45mn to $462.1 at 2020 year-end. However, the increases were explained by the company in its statement as sourced from its credit facilities amounting to $200mn, which is reflected in an increase of its Current Portion of Long Term Debt for 2020 Q2, where it rose to $401.08mn from $201.92mn. It has since then paid half of the $200mn it borrowed in 2020 Q4, where Current Long Term Debt decreased to $304.68mn, and the remaining half in 2021, which should reflect in 2021 Q1. That being established, the company holds a good quantity of cash it can use for business-related activities even after repayment of a large amount of debt. Total Assets were up from $992.23mn in 2019 to $1.2bn in 2020, massively driven by the increase in cash holdings. It is very essential, therefore, for WWE to transform the cash it has into opportunities for 2021, especially with the less stringent lockdown rules and the increasing trend of opening up sporting events to the public in some countries. Formula One and the Australian Open has had experience in 2020 and 2021 of events that were opened to a public audience, and WWE can explore what it can learn from these events. The issuing company will more likely continue to face as well as dealing with its liabilities. Although Total Liabilities declined in 2020 Q4 to $908.53mn versus its 2020 Q3 levels as a result of its debt payments, it still represents a large increase from 2019’s $716.91mn. As large as the company holds in its Capitalised Lease Obligations, wherein it has a chunky $379.89mn, the larger half of its liabilities are under current liabilities, which if it fails to service it might need to negotiate for more debt or a restructuring of its debts. It is an area to look out for in 2021 on how the company decides to proceed on its debt servicing and how it will impact the net income of the firm in the next two or even three quarters of 2021.

Cash Flow

The annual Net change in cash, an area earlier touched upon, was at a gain of $371.66mn as WWE borrowed causing its cash holdings to increase massively. But it was not all debt-based gains, with annual net operating cash flow for 2020 at $319.87mn, representing a 164.39 per cent from 2019’s figures. This figure also indicates that most of its net gains in its cash were from operating activities. As a reference, the net financing cash flow, where the intake of debt would be recorded, only was at $39.91mn even with the firm borrowing $200mn. This is largely due to its continued payment of dividends to investors amounting to $37.25mn for the whole year, and its reduction of long-term debt by $114.39mn. 2020’s rise in Net Income, a welcome sign with the debt undertakings of the company, is a significant point to the resilience of WWE and shows that it has managed to adapt its business to be able to create more value despite the limitations imposed by the pandemic. Receivables were at $70.04mn, which pushed Working Capital higher by $42.17mn in 2020. The company also took in more cash from its investing activities compared to 2019, with an $11.88mn net gain as it both recorded a lower capital expenditure and higher sale of investment in 2020. Annual Free Cash Flow was also a gainer, with 2020 numbers at $292.21mn.

Similar to the other two statements, investors need to watch for quarter-on-quarter performance as net income plummeted in 2020 Q4, and it was not alone in the dive. Net Operating Cash Flow, Net Investing Cash Flow, Net Financing Cash Flow, and Cash all decreased in the same period. Although the $112.07 outflow related to Net Financing Cash Flow can be explained by the $9.34mn worth of dividends paid to investors and the $102.69mn reduction in long-term debt, another way of looking at the numbers mean that significant amounts are being allocated to service the company’s long-term liabilities. Net Operating Cash Flow was driven lower by the significant decrease in 2020 Q4’s net income, which could be rectified if live attendance in events is slowly allowed by the government and if WWE manages to improve its reach in the digital and broadcast realms of the business.

Dividends

WWE managed to pay out $0.48 worth of dividends ($0.12 per quarter) in 2020 despite the challenges it faced in its operations. For the first quarter of the current year, the company is going down the route of consistency and declared on 28 January that dividends worth $0.12 per share as well will be paid on 25 March, with the record date on 15 March this year. The amount represents a signal to investors that it can reward those who stick to the stock with stable pay-outs, rain or shine. That being a given, it must be also asked why it has not changed the amount of quarterly dividend it has given out since 2011 Q2. There are two sides to the coin at this point. First is that WWE, no matter the current climate and for almost ten years running (a lot of consecutive quarters), has managed to be a constant dividend payer with all the different economic dynamics of these intervening years. In addition to this, the total amount paid to investors for the year sum up to $37.25mn, which is not a measly amount concerning the numbers the company report. The other side is that there is a question of why the amount paid has remained at a low of $0.12 despite the growth during the same period. In total, it might be considered that the current dividend amount is too low, while this should be looked at as a prospect for a short-term investment to hold until the payment date.

Stock Price

WWE ended the 5th March 2021 session near its year-to-date highs, closing at $54.50, which also represents its highest close since February 2020. While it has already increased and recovered from its downtrend at the height of the market crash in March 2020, it is yet to reach its 2019 levels, let alone its 2018 highs. Based on this last price close, 2020 annual EPS of 1.7, and outstanding shares at 77.79 million shares, the P/E ratio is at 32.06x, while the P/B ratio is at 10.90. The figures highlight even more charge number of the firm’s liabilities in bringing down the book value, therefore pushing the P/B ratio higher and making an evaluation of the firm’s upside or downside potential needing second thought. The high P/E ratio might also imply that the stock is overvalued, or that earnings may still have upside potential in the next few quarters. The second scenario is a possible outcome in Q1 and Q2 of 2021 as entertainment events, in general, could be allowed to admit the public. In this scenario, WWE will highly beneficial as it will generate additional income not just in events in the United States, but also in its international event portfolio. In the book sense of the ratios, these conventionally point to overvaluation and that there is a downside risk, hence the stock should not be a buy. However, the potential investor also needs to take into consideration that a high P/E, coupled with the company managing to turn out a considerable annual net income despite the effects of the pandemic on its revenue stream, could also signal upside in earnings which could help the stock recover to at least its 2019 levels.

Taken from Nasdaq

Verdict

For dividend-looking investors, a dividend of $0.12 seems relatively low compared to other stock options. One thing to consider on this front is the ability of the firm to deliver consistency in its payouts. In this regard, there is a reason to buy and hold the stock until the payment date of the dividend passes.

The P/B ratio points out that the current price is too high. However, the P/E ratio can be interpreted in two ways. It can be seen as confirming overvaluation, or it can be looked at as a potential for a further upside for higher or more stable earnings. The company is looking for more room to grow and to shift its strategy in expanding its reach while the majority of cities in the United States and other countries continue to be in lockdown. The Wall Street Journal reported that WWE agreed to sell the United States rights of its content to NBC’s online streaming service Peacock, with the company making WWE Network active only for users abroad. The online realm is increasingly important for WWE, and it highlighted that aside from its continued delivery of content, 6 per cent more average paid subscribers were added in 2020 Q4 and that its online video views across its platform rose by 10 per cent. The company had laid-off workers to decrease its expenditure while looking to return to admitting the public to its events this 2021. Both actions should provide a boost in income generation and would help push revenue higher. These make the stock a prospect for investors looking to add companies with upside potential to their portfolio.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.