New TV Deals Aren’t Enough To Justify WWE’s Inflated Price – World …
July 27, 2018 - WWE
World Wrestling Entertainment (WWE) has been on a rip of late. Shares sealed on Jul 26 during $83.85, that is adult ~110% in a final 3 months, adult ~3x in a final year and adult ~7x in a final 5 years.
I missed a vessel on these gains. Back in Oct 2017, we published an article (now paywalled) on this platform, valuing WWE during $20/share, formed on a then-known information. At a time, shares traded during $23, so we chose not to squeeze shares in a company. Mea culpa.
Based on their new TV deal and strong quarterly results, we motionless to take another look, to see either we can clear investing in WWE. Their new TV deals will supplement ~$278 million in income to a association over dual years, usually from U.S. radio rights.
New TV Deals
The primary matter for transformation given May has been rumors, and afterwards a announcement, of WWE’s large new radio deals in a United States for their flagship programs, SmackDown and Raw.
The WWE announced a deals on Jun 26, with Monday Night Raw staying on a USA Network and SmackDown Live relocating to Friday night on Fox (from a stream home of a USA Network). Raw is a three-hour live pro wrestling radio show, while SmackDown is a two-hour live pro wrestling show. Because both shows are promote live, they can authority aloft kingship fees, as live programming is some-more frequently watched live (commercials and all) and reduction frequently DVR’ed (where viewers will mostly skip advertising).
SmackDown relocating to network radio is good news for WWE, though batch cost gains were driven by a dollars behind a deals. WWE will dramatically boost their income by a mixed of these dual deals. These deals will also boost their exposure: WWE programming will be promoted by both NBCUniversal/Comcast (CMCSA) and by Twenty-First Century Fox (FOX; FOXA) rather than usually on NBCUniversal.
The new radio deals run from Oct 1, 2019, to Sep 30, 2024. As shown, a understanding will more-than-double radio income in dual years, adding ~$278 million in additional income between 2018 and 2020. For context, WWE had income of $801 million in 2017, so this additional income represents ~35% some-more income for a company.
Further, this new income carries minimal additional costs. The association already front both Raw and SmackDown live any week, and a lengths of these programs is not changing. SmackDown will pierce from Tuesday dusk during 8pm-10pm to Friday dusk during 8pm-10pm, that competence impact ratings though is doubtful to almost change costs.
These new radio deals were a outrageous win for a company, though is a time right to buy into this high-flying wrestling promotion?
WWE essentially marks a possess opening regulating their non-GAAP Adjusted Operating Income Before Debt and Amortization or Adjusted OIBDA. This is also a metric a association frequently projects a destiny using, so it creates clarity to use it to cost WWE.
As shown above, a trailing EV/EBITDA of a WWE has risen neatly over a past few months given of a softened radio deals. Similarly, WWE’s trailing EV/Adjusted OIBDA has also risen sharply:
Source: WWE press releases and YCharts
Much like a EV/EBITDA above, WWE’s EV/Adjusted OIBDA hovered in a operation of ~17-22 adult until a new radio understanding came into play.
WWE has also supposing some tone on their destiny practiced OIBDA. The association expects an practiced OIBDA of $160-$170 million in 2018, formed on their presentation on Jul 26. In 2019, WWE has formerly foresee an practiced OIBDA “of during slightest $200 million,” as of Jun 27. It competence be satisfactory to advise that this implies an boost of ~$40 million, if we appreciate during slightest $200 million to be in a $200-210 million range. That competence infer to be conservative.
In a same presentation, WWE called for TV income to burst $78 million in 2019 and a serve $200 million in 2020. This implies that ~50% of a boost in TV income in 2019 will make a approach to practiced OIBDA. Based on that increase, and on scale, it competence be satisfactory to advise that maybe 50-75% of a additional income in 2020 will done a approach into practiced OIBDA, after permitting for staff to accept raises and for other augmenting costs. That would indicate practiced OIBDA in a operation of $300-350 million in 2020. Perhaps, WWE could widen this OIBDA to $400 million, if they can keep costs in check for a subsequent dual years or if other income gains equivalent augmenting costs.
As of their most new earnings, WWE had 87.1 million diluted shares and a net money position of $313 million (excluding automobile debt, that is enclosed among a diluted shares). This implies a following operation of values, as of a finish of 2020 (using a trailing multiple).
Stated another way, these multiples and 2020 Adjusted OIBDA would indicate a following destiny returns, formed on WWE’s $83.85 shutting price, until a finish of 2020:
Based on these figures, we would usually be peaceful to deposit in WWE if we was assured a association can grasp $400 million in OIBDA and contend a 22x multiple. However, we wouldn’t be assured WWE can contend a 22x multiple, that is a unequivocally tip of their before operation (and that mixed was expected shabby by rumors of a new radio deal).
To grasp 10% annual returns, WWE will need to trade during ~$104 by a finish of Dec 2020 (adjusting for a 0.59% dividend). With an 18x multiple, this would need 2020 Adjusted OIBDA of ~$490 million, and with a 20x multiple, this would need a 2020 Adjusted OIBDA of ~$440 million.
Those numbers will be formidable to hit, formed on WWE’s settled expectancy of “at least” a $200 million OIBDA in 2019. Based usually on a new US TV deals, income would arise $200 million, though WWE would need to supplement another $40-90 million in OIBDA.
I have been wrong about WWE before. Nine months ago, we chose not to buy shares, and they’ve scarcely quadrupled given then. Meanwhile, WWE has executed intensely well, delivering extraordinary earnings for shareholders and negotiating good deals for their flagship shows, that will boost both income and bearing for their product.
To uncover 10% earnings for their shareholders, we design that WWE will need an practiced OIBDA in a operation of ~$440-490 million in 2020. While their U.S. radio agreement will get them a prolonged approach towards this goal, it is doubtful to get them all a approach there. To strech this goal, WWE will also need to boost their income in other areas (such as WWE Network income or general radio rights fees), and a continued ability to keep costs underneath control.
I was wrong about WWE 9 months ago, so we will not contend they can’t do it. WWE has also been consistently violence a Adjusted OIBDA expectations: In February, WWE expected 2018 Adjusted OIBDA of during slightest $140 million. In May, WWE raised their full-year Adjusted OIBDA superintendence to $150 million. In July, WWE has again lifted a full-year Adjusted OIBDA superintendence to $160-170 million.
Based on that history, WWE could pound their stream guidance, both this year and subsequent year. It isn’t unequivocally formidable to trust that they could strike $440-490 million by 2020, that would yield shareholders with a good distinction even if multiples lapse to a “normal” 18x-20x level.
That said, WWE during $83.85 still looks too abounding for my taste. With good execution, a association can broach plain returns, though it is formidable for me to disagree that a association is underpriced. And this isn’t unequivocally a expansion company: Professional wrestling can expected usually get so big, until a subsequent Stone Cold Steve Austin emerges.
For now, I’ll sojourn on a sidelines.
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Disclosure: I/we have no positions in any bonds mentioned, and no skeleton to trigger any positions within a subsequent 72 hours.
I wrote this essay myself, and it expresses my possess opinions. we am not receiving remuneration for it (other than from Seeking Alpha). we have no business attribute with any association whose batch is mentioned in this article.