WWE is a great business with a strong moat that has a proven record of high returns on invested assets and returning cash to shareholders. The stock is currently depressed due to the weak economy, a cyclical downturn in the popularity of its superstars, heavy investments in a film business that is not yet profitable, and pending heavy investments in the potential launch of a cable channel. Buying at the current depressed multiples is not without short term risk as free cash flow will be impaired in the near term (2-3) years as these new business lines are pursued. However, high insider ownership, management commentary that they will kill off non performing businesses, and a track record demonstrating a willingness to kill off money losing businesses should give comfort to investors with a longer time frame. If these new businesses are successful, the stock will revert to historic multiples (20x PE average over last several years vs current 10x adjusted PE) in short order. If these businesses are not successful I believe they will be killed off within 3-4 years. This will allow the company to resume generating large amounts of FCF which will fill in the hole dug while trying to launch these new businesses, and allow the stock to once again trade at historic multiples. Either way the result is a 50-100% gain in the next five years.
This write up is a bit on the long side, so you’ll have to go to scribd to check it out. Please comment here if you have any thoughts. All feedback is appreciated.
Disclosure: I am long WWE. Don’t assume that I know what I am talking about.