Sunday, November 09, 2008

WWE: Again, it's all about the cash flow, by Steven Mallas - Blogging Stocks - 7th November 2008

World Wrestling Entertainment reported results for the third quarter, and by just about all accounts, things were tough. Revenues were flat at $108.8 million. Net income on a per-share basis, however, dropped almost 42% to $0.07. Talk about getting slammed to the mat! But the really bad aspect was the cash-flow statement. This has been a constant theme as of late. The company's operational cash flow declined massively during the nine-month period, coming in at $17.7 million. Know how much money was paid out in dividends? Try almost $61 million. That's probably why WWE's stock yields over 10%.

So what's the problem here? A couple things. First, costs need to be controlled (the press release does mention this issue, as well as a desire to be more careful when it comes to capital expenditures). Second, CEO Linda McMahon has to get fans excited about wrestling again. If you look at the buy rates for the pay-per-view events, you'll notice they've been declining. I think one thing that WWE must do is figure out a way to make its secondary pay-per-view shows a must-purchase item for the part of the fan base that falls outside of the hardcore wrestling viewer but doesn't exactly reach the realm of the casual audience. If the company can bring shows like The Great American Bash and Unforgiven up to the level of a SummerSlam, then the company will really be on a growth track.

Thing is, though, that is easier said than done. In fact, categorizing that goal as being easier said than done is probably one of the biggest understatements I've ever written. Those who watch wrestling realize that trying to make every event a regular Royal Rumble would put a heck of a lot of pressure on the grappling talent. WWE needs to inject its storylines with that often talked about X factor so that fans will come back to the cable boxes. WWE is no different than a Disney or a Viacom -- when your product is losing viewers, it's time to break out the creative magic (as well as the marketing mojo).

WWE does seem to want change, however. According to this press release, a new COO has been installed. Donna Goldsmith from the consumer-products segment will replace Mike Sileck in that capacity. The message to Wall Street is clear: WWE knows that a new direction is needed, and it's willing to see if an executive shift can act as a positive catalyst. She had better, because WWE wants to maintain its dividend. The investments being made in the company's movie assets are, in part, essentially sacrificing the cash-flow statement for future growth (working-capital changes also affected cash flows, it should be noted).

Things will be fine long-term if those investments reap a stellar return on capital. Hopefully Goldsmith can help steer that division to a higher level of prosperity. WWE's stock was near a 52-week low as of Thursday's market close, and I think it could make a good long-term investment. However, I would use a tight stop on it, and I would consider cautiously watching the price action before buying. No need to rush in right after this earnings report.

Disclosure: I own Disney; positions can change at any time.

Greg Tingle comment...

It's an excellent sign that the WWE top brass are doing something about the issues, rather than turning a blind eye and pretending that a problem or two doesn't exist. That's part of the reason it's a good thing to have family money tied up in a family business. It guarantees that enough people at the top of the chain give a rats, and won't let the company or the product go to crap. One might suspect that if America was operated like McMahon runs the WWE or if the UK was ran like the tightly run ship that Richard Branson's Virgin Group of Companies is, much of the Western world's finances would be in better shape and there wouldn't be so many Chapter 11's and worse on the books. It will be interesting to see how many weeks, or more likely months, it will take McMahon and the board to turn the ship around.


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