Here's Why You Should Hold World Wrestling Entertainment Now

World Wrestling Entertainment, Inc. (NYSE:WWE) banks on subscriber growth, rise in TV rights fees and strategic initiatives. Though these positives instil optimism, factors like declining revenues at home entertainment and highly competitive market of entertainment video raise concerns. Further, with WrestleMania 34 around the corner, investors are treading cautiously as the stock has failed to perform post the show. Though, the stock has returned 18.3% in the past three months, outperforming the industry’s gain of 2.7%, it has declined 4.4% in a month.

Hidden Catalyst

We believe that WWE will continue to report record revenue growth as it has not only extended previous deal with different companies but also signed agreement with new service providers for airing its flagship program Raw and SmackDown in different countries. In fact, the company’s 2016 and 2017 revenues of $729 and $801 million not only beat the Zacks Consensus Estimate but also jumped 10.7% and 9.8%, respectively. The company’s record revenues primarily came on the back of a substantial increase in revenues in North America, Europe/Middle East/Africa (EMEA) and gain in WWE Network’s total subscriber base.

Revenues from international sponsorship surged in 2017, courtesy of the addition of blue-chip advertisers such as KFC, Nestlé, AT&T (NYSE:T) and other gaming partners. Moreover, in an effort to boost revenues, WWE has reached an agreement with sports marketing agency Lagardère Sports that will facilitate it to acquire international sponsorship.

In the long haul, the company will continue to bank on its content distribution agreement. Recently, the company stated that distribution agreement, which generated a large chunk of television rights revenues, will expire in 2019 in some regions. Licensing of Raw and SmackDown in the United States will terminate in Sep 30, 2019, while in the UK and India it will expire on Dec 31, 2019. The company is looking to renew the distribution agreement in these regions somewhere between May 2018 and first-half 2019.

After posting robust adjusted OBIDA growth in 2017, management is optimistic about witnessing another great year of OIBDA growth. In this regard, the company is targeting adjusted OIBDA of at least $115 million in 2018. Moreover, excluding stock-based compensation expenses, WWE projects adjusted OIBDA to be at least $140 million in 2018.

Hurdles

WWE, which distributes home entertainment content in both physical (DVD and Blu-Ray) as well as digital formats, has been witnessing decline in revenues. In 2016, home entertainment net revenues came in at $13.1 million, down from $13.4 million and $27.3 million in 2015 and 2014, respectively. Further, the trend continued in the first, second, third and fourth quarters of 2017, with home entertainment revenues declining 27%, 3.2%, 8% and 79%, respectively.

With WrestleMania 34, to be held on Apr 8, 2018, at the Mercedes-Benz Superdome in New Orleans. The success of this event was earlier decided on the pay-per-views (PPV) for the show, as this was the most important source of revenue generation. The company has been broadcasting PPV since the 1980s with WrestleMania considered as the longest-running PPV event. However, with the launch of WWE Network there has been a sharp decline in PPV revenues, which is a major concern for the company.

Mega event like WrestleMania is considered the Super Bowl of Sports Entertainment. Looking back, we note that WWE has not achieved its projected targets. Despite the hype, the stock has witnessed declines of 1.7%, 4.3%, 14.7% and 14.7% post the WrestleMania 33, 32, 31 and 30, respectively.

Zacks Rank & Key Picks

WWE carries a Zacks Rank #3 (Hold).

A few better-ranked stocks are Time Warner Inc. (NYSE:TWX) , MSG Networks Inc. (NYSE:MSGN) and Viacom, Inc. (NASDAQ:VIAB) . All these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Time Warner has an impressive long-term earnings growth rate of 8.4%.

MSG Networks has reported positive earnings surprise in the trailing three quarters.

Viacom has long-term earnings growth rate of 6.6%.

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