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Can World Wrestling Entertainment Keep the Bull Run Alive?

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Shares of World Wrestling Entertainment, Inc. (WWE - Free Report) are riding high on record revenue growth, efforts to reach agreement for airing its flagship program Raw and SmackDown in different countries and deal with Lagardère Sports. The company’s initiatives to drive the top line higher have helped the stock to gain 17.4% year to date, outperforming the industry’s decline of 4.5%. However, decline in home entertainment revenues and pay-per view revenues remain primary hindrances at the moment. Let’s delve deeper.

Hidden Catalyst

Strategic Efforts

In order to boost WWE Network’s revenues, the company has been implementing certain strategies including the development of fresh content, execution of customer acquisition and retention programs. The company is also increasing distribution platforms, introducing new features and foraying into new locations to improve revenues. Further, WWE Network is available in Indian Subcontinent, Germany, Austria, Malaysia, Switzerland and Japan.

Record Revenues Growth

The year 2016 registered record revenues generation in the history of the WWE. The company’s record revenues primarily came on the back of substantial increase in revenues in North America, Europe/Middle East/Africa (EMEA) and gain in WWE Network’s total subscriber base. The company has carried the momentum of 2016 in to 2017, with the first and second quarter witnessing revenue growth of 10% and 8%, respectively.

Recent Agreements to Drive the Top Line Further

We believe WWE will continue to report record revenue growth as it has not only extended its earlier deal with different companies but also signed agreement with new service provider for airing its flagship program Raw and SmackDown in different countries.

The strong relationship between WWE and Groupe AB is set to continue in to the 18th year with both companies extending the partnership. Per the deal, both the companies have signed multi-year agreement for airing WWE programming, which comprises of WWE’s leading shows including the likes of Raw as well as SmackDown.

In July, in an effort to augment revenues WWE reached an agreement with sports marketing agency Lagardère Sports, which will facilitate it to acquire international sponsorship. Per the agreement, Lagardère Sports will help in building partnership portfolio through its sponsorship proficiency and global sales channel in all international regions, excluding China. We believe with increasing subscription based video streaming services WWE Network through its vast presence in over 180 countries will aid top-line growth. WWE Network paid subscribers increased 16% in first-quarter 2017 to 1.57 million.

The company has recently also reached an agreement to broadcast hit programs like Raw and SmackDown in Japan, Caribbean and Australia. Notably, WWE and TVA Sports also signed an agreement for airing Raw in French, beginning Oct 10.

Optimistic about OIBDA Growth

Management is optimistic about achieving another great year of revenues and adjusted OIBDA growth. The company is targeting adjusted OIBDA of $100 million, which is nearly up 25% from the 2016. In first-half 2017, the company has already generated adjusted OIBDA of $36.7 million. For the third quarter, adjusted OBIDA is projected in the range of $31-$35 million driven by top-line growth, WWE Network subscribers and contractual television rights fees. In the fourth quarter, it anticipates adjusted OIBDA of at least $28-$32 million.

Hurdles to Cross

WWE home entertainment has been witnessing decline in revenues. In 2016, home entertainment net revenues came in at $13.1 million in comparison with $13.4 million and $27.3 million in 2015 and 2014, respectively. Further, the trend continued in the first and second quarter of 2017, with home entertainment revenues declining 27% and 3.2%, respectively. The decline in home entertainment revenues can primarily be attributed to steady shift of consumers to digital formats, downloaded or streamed over the Internet.

Decline in pay-per-view revenues is a major concern for the Zacks Rank #3 (Hold) company. In 2016, the company generated pay-per-view revenues of $12.6 million in comparison with $20.6 million, $45.2 million, $82.5 million and $83.6 million in 2015, 2014, 2013 and 2012, respectively. These represent 2%, 3%, 8%, 16% and 17% of total net revenue in 2016, 2015, 2014, 2013 and 2012, respectively. Launch of the WWE Network was responsible for this sharp decline in pay-per-view revenues. The launch of WWE Network had altered the distribution of WWE’s pay-per-view programs and lowered the monetization of assets through other platforms like pay-per-view as well as content distributed on digital platforms.

Key Picks

Better-ranked stocks worth considering include Gray Television, Inc. (GTN - Free Report) , Rogers Communications Inc. (RCI - Free Report) and The New York Times Company (NYT - Free Report) . Both Gray Television and Rogers Communications sport a Zacks Rank #1 (Strong Buy), while The New York Times carries a Zacks Rank #2 (Buy).  You can see the complete list of today’s Zacks #1  Rank stocks here.  

Gray Television has reported positive earnings surprise in the trailing four quarters, with an average of 43.1%.

In the past six months, Rogers Communications stock has increased 26.9%.

The New York Times has an impressive long-term earnings growth rate of 16.8%.  

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