Does WWE Deserve Its Recent Upgrade?

In the wrestling world, a "bump" is what a performer endures when his or her opponent puts a serious move on them. On Wall Street, a "bump" is a stock-price jump, usually on a piece of good news. World Wrestling Entertainment (NYS: WWE) was on the receiving end of the latter variety after one analyst tracking it upgraded the shares from "neutral" to "buy." But have the company's fundamentals changed so much that it's deserving of this prize?

Remote revenue
The analyst, Richard Ingrassia of Roth Capital Partners, upped his recommendation because of WWE's recent success in boosting some of its critical numbers and its potential with new revenue streams.

He has several very good points. The company was very effective in attracting more customers to its pay-per-view events, always and forever one of its most critical revenue generators. In its most recent quarter, WWE's take from those offerings increased 19% year over year. This included pay-per-view buys from the company's big annual extravaganza, WrestleMania. When the take from that event is factored out, non-WrestleMania pay-per-view receipts grew 28% in the same time frame, which is an impressive lift.

All of that is important because pay-per-view is the top source of revenue for the company. In the quarter it exceeded the take for live events, bringing in $40.8 million. The two categories combined accounted for 54% of total net revenues.

Crowding the TV schedule
The analyst was also encouraged by the company's tightening grip on the television airwaves. It's recently managed to leverage the success of its long-running Monday Night Raw and Friday Night Smackdown wrestle-fests by securing a few more hours of programming. Raw just experienced a steroid-like pop from its former two-hour format to an epic three, while two new shows have recently made their debut or will soon stomp across the screen.

The first is Main Event, an hourlong program to air on Ion Television, and the second is Saturday Morning Slam. The company is still fairly opaque about the content of the first, which will begin its run in October. As for the second, now airing on CBS's (NYS: CBS) and Time Warner's (NYS: TWX) network The CW, it's a kid's show featuring WWE performers in G-rated bits geared toward the younger set.

CBS and Time Warner probably want to get in on the successful wrestling action currently dominated by their rival broadcaster, Comcast's (NAS: CMCSA) and General Electric's (NYS: GE) NBCUniversal. Both Raw and Smackdown air on NBCUniversal cable channels, and they have been ratings winners for years.

A more enticing development in the TV sphere is the upcoming launch of WWE Network, a 24-hour, wrestling-and-nothing-but cable channel. It's a logical extension of the company's existing offerings and a fine way to leverage the massive amount of footage it's filmed during its many years in the business. It also has plenty of content from formerly rival productions it's bought out, such as brief 1990s success story WCW (operated for several years by Time Warner) and the more violent ECW.

By Ingrassia's calculations, assuming WWE Network launches sometime in the near future, it could bring in $68 million in revenue for fiscal 2013. That would add considerably to the company's results, considering that its most recent full year saw a top line of $489 million.

Live-event hammerlock
The recent developments in TV certainly support the analyst's bullish view on the stock. If WWE were a pure play on a single medium, the market would probably be more excited about the stock and bid it up much higher than the 4% or so increase it saw after the upgrade was effected.

But it isn't. As previously advertised, one of the company's big revenue planks is live events; after all, that's what the wrestling business was built on, and it's still the oxygen feeding the company. Unfortunately, the take from that segment was basically flat on a year-over-year basis, indicating pronounced underperformance from the non-WrestleMania shows. After all, this year's edition of the annual extravaganza was powerfully successful, grossing a record $8.9 million -- $1.7 million higher than the previous top dog, 2009's WrestleMania XXV.

A dividend on steroids
A bigger worry looming over the company is the questionable way it manages its money. It spits out a fat dividend that drains its coffers; at current levels, its payout ratio is a whopping 126%. Few companies can get away very long with that kind of rate, and that money could probably be put to better use by pumping it back in the business. Vince McMahon, the company's CEO and guiding creative light, and his family still own a huge majority in the company, and they've never been able to shake the impression that they're effectively rewarding themselves at the expense of shareholders.

Granted, WWE has been improving in several key areas lately. Does this mean it's on the bright path to future growth and better returns? The market doesn't seem to think so. After all, that stock-price bump was barely noticeable, and hardly the thundering body-slam the shares need for a serious rise.

WWE business partner General Electric has plenty of media assets, and that's only one small corner of this huge and fascinating company. In our premium report on the company's stock, we give you the up-to-the-minute skinny on its prospects. The report is dense and informative and includes a full year of quarterly updates, for an introductory price of only $9.99! It's readily available for purchase.

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Fool contributorEric Volkmanowns shares of World Wrestling Entertainment. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days. The Motley Fool has adisclosure policy.

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