Listen up, wimps! World Wrestling is back!, by Michael Brush - 1st July 2004
(Credit: MSN Money - Company Focus)

Or at least that's the talk at the company that dominates professional wrestling. It says new stars and global expansion can grab audiences again.

By Michael Brush

Not long ago, many on Wall Street figured professional wrestling -- as an investing idea, anyway -- was down for the count.

Today, 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 arena.

How big a win could be in store for shareholders of World Wrestling Entertainment, the company that runs the sport?

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.

And 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.

Fortunately 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.

Here's a closer look at one of the nation's most surprisingly popular entertainment outlets.

On the rebound

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.

With 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.

By 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.

Then 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.

Now what? Does this unlikely Wall Street contender get the girl, too?

Investors 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 help.

Before 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.

An 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).

Thursday 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.

To 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.

First 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.

"Stone 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."

On many levels, in other words, wrestling is a soap opera for young males, who make up about two-thirds of the fan base.

Then 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."

Phil 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.

But 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.)

A 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 events.

But 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.)

Now, 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.

The 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.

Here's 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.

But the potential for investors is greater if WWE grooms upcoming talent into hot stars. Meanwhile, here's how it will turn the business around.

The comeback strategies

While 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.

Brand 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 to develop.

WWE 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.

First, 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.

Second, 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."

Sooner 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.

International 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.

The 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 the vaults.

WWE 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.

And 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.

The 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."

Insiders 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.

In fact, if you buy the stock and you're not a big fan of wrestling, WWE still makes it easy for you to track its progress.

The 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 Web site.

At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column.

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