Wall Street Bets Big On World Wrestling Entertainment's Future

World Wrestling Entertainment, Inc. WWE’s annual average fees for its "Smackdown" and "Raw" programs will increase 3.6-fold to $524 million under new deals struck with Comcast Corporation CMCSA’s USA Network and Twenty-First Century Fox Inc FOXA’s Fox Sports.

The five-year terms announced Tuesday prompted an 11-percent spike in WWE’s stock and reinforced analyst enthusiasm.

U.S. Growth

Shareholders could reap all the profits of Year 1 revenue expansion.

“We see no reason why the incremental $400 million should not be able to drop entirely to the bottom line,” MKM Partners wrote.

In spite of the increase, which already exceeded Street forecasts, Guggenheim sees room for continued growth at the next U.S. renewal.

“Even at a $524 million AAV, WWE still significantly under-indexes all other professional sports contracts on a per viewer hour basis,” analysts wrote wrote.

At the same time, digital streaming rights could provide other revenue channels contributing additional upside, and the company could claim growth through sponsorship and advertising, incremental content deals and WWE Network tiering.

“With successful renewals in the United States under its belt, and likely more to come, we believe WWE is in the process of being re-rated to reflect the dramatic changes of its brand and profitability profile,” KeyBank wrote. “The terminal implications imply that with execution, WWE has the potential to invest and set itself up for even more lucrative TV renewals and accelerate international OTT growth.”

International Upside

The increase in U.S. contract value “implies that with successful renewals in the U.K. and India estimates still have room for meaningful upside,” KeyBank wrote.

If WWE just maintains its U.K. and India contracts without raising the value, the company will still exceed aggregate expectations. But it could do even better.

“Considering WWE saw increases in these countries that were multiples higher back in 2014, we think these additional deals can add a significant amount of revenue on top of tonight's guided figures,” Wells Fargo wrote Tuesday.

Guidance And Forecasts

KeyBank anticipates 2019 operating income before depreciation and amortization of about $232 million against company outlook of at least $200 million. Guggenheim forecasts $230 million and MKM Partners $212 million.

MKM also predicted 2020 OIBDA could exceed $400 million to yield $280 million in free cash flow, and it warned that its price target may rise nearly 50 percent on yet-to-be adjusted calculations.

“With essentially no debt and a modest $40mn annual dividend payment, WWE should be facing the high quality problem of what to do with its excess cash,” MKM analysts wrote. “High business model visibility into 2024 could also make it an attractive buyout candidate, in our view.”

The Ratings

• Guggenheim maintained a Buy rating and raised its price target from $68 to $82;
• KeyBank maintained an Overweight rating and $71 price target;
• MKM Partners maintained a Buy rating and a $68 price target; and
• Wells Fargo maintained an Outperform rating.

WWE's stock traded around $71.37 at time of publication, up 7 percent on the day. Shares are up more than 250 percent over the past year.

Related Links:

Wells Fargo Sees More Upside For WWE Thanks To 'Raw' And 'Smackdown'

25 Biggest Moments In WWE's Wall Street History

Image credit: GabboT, Flickr