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Wednesday, April 16, 2014 5:46 PM ET

Part 2: WWE's fall from grace
By Sarah Barry James

World Wrestling Entertainment Inc.

knows how to get

Tools Related Companies World Wrestling Entertainment Inc. (WWE) 21st Century Fox Inc. (FOXA) AMC Networks Inc. (AMCX)
Last Updated: 4/17/2014 12:31 PM

attention. Fans, for instance, could not stop talking after WrestleMania XXX saw the end of The Undertaker's winning streak, which stretched back into the early '90s. And investors have been buzzing about the company's streaming network and the renewal of WWE's TV rights deal. But at least one investor believes that WWE was getting too much attention — at least on Wall Street — and not necessarily the good kind. In the months leading up to WrestleMania XXX, WWE had seen a noticeable spike in share price. As of mid-March, the company was trading above $30 per share, whereas it had been trading below $10 per share just six months earlier.
$ 21.44 $ 32.50 $ 68.88 (2.41%) 0.68% (0.19%) More>>

Sources Amvona: The Short Case for World Wrestling Entertainment Users Also Read Part 1: WWE Network profitable or on the ropes? Tuesday, April 15, 2014 2:04 PM NBCU launches digital video initiative - Tuesday, April 15, 2014 3:32 PM MobiTV's plan to help cable bring down Chromecast - Wednesday, April 16, 2014 1:21 PM Lawmakers skeptical of Comcast-Time Warner Cable deal - Wednesday, April 09, 2014 4:11 PM WWE Network to reach 1 million subs by end of 2014 - Monday, April 07, 2014 9:31 AM

Emmanuel Lemelson, chief investment officer of Lemelson Capital, told SNL Kagan that even in mid-March, when WWE shares were hitting record highs, he knew the stock was in for a fall. "You've got a certain type of person that was being attracted to this security — the retail investor, who is easily excitable and excited about the brand," he said. "WWE has done a great job with their fan loyalty and … secondly, you have an unusually good promoter for the CEO. Every CEO will promote his stock as being a good deal but not every CEO is a professional promoter and that's what Vince McMahon is. That's what he does well."

Of course, it was not just retail investors who were excited about WWE shares. The company was also getting a lot of attention in the media, and rumors even began circulating that WWE could be the target of an acquisition. "If you looked at the amount of coverage these guys were getting, it was a juggernaut and I think it really attracted in a lot of retail investors," Lemelson said. "But if you had perused what the mainstream media was saying … there was very little buttressing the story or the financials behind it." Based on this belief, on March 17, Lemelson published a report titled "The Short Case for World Wrestling Entertainment," arguing that the premium the shares were enjoying could not be justified when one considered its historical net income or its potential for new income going forward. The report proved timely, as shares in WWE began to fall March 21. Though the declines were mild and inconsistent at first, it turned out the stock was in store for a deep plunge. On April 7, the stock closed at $23.90 per share, down almost 15% from a previous April 4 close of $28.02. As of April 16, shares in the company closed at $21.97. Lemelson said he was not surprised by the drop for a number of reasons. He noted his concerns about the over-the-top WWE Network that the company launched earlier this year, as well as the significant short interest in the stock. Indeed, Lemelson is correct that WWE shares have seen an increase in short interest over the last several months. According to the most recently available data from SNL Kagan, WWE short interest position rose 90 basis points during the last half of March to end March 31 with short interest on 16.23% of outstanding shares. Another concern for Lemelson is WWE's management team, as he is unconvinced the company will be able to grow its net income given recent declines. "Really for four years, earnings have been eroding pretty rapidly," Lemelson said. "The company's making tremendously bad decisions financially. They really lost $30 million in cash last year and they are taking out debt to buy a private jet. That's not prudent." The jet in question is the 2007 Bombardier Global 5000 jet that WWE agreed to purchase for $27.0 million in 2013. Including improvements made to the jet, the total price was estimated at $32.0 million, and the company entered into a seven-year secured loan with RBS Asset Finance Inc. for $31.6 million in order to finance the expense. Notably, the loan has an extremely low interest rate at 2.18% per annum.

But while Lemelson may feel the drop that WWE has seen in its stock price is justified, others say the market overreacted and WWE shares are presently undervalued. National Alliance Securities analyst Robert Routh, for instance, upgraded his rating on the company to "buy" from "hold." Taking the opposite view of Lemelson, he sees several reasons to be bullish on the stock, including the company's new streaming network and the ongoing negotiations for a new TV rights deal. "WrestleMania 30 … reached a record 1 million U.S. households via the WWE Network and U.S. pay-per-view, marking the first time WrestleMania has reached this number of domestic homes," Routh noted in an April 16 research report. "WrestleMania's International PPV numbers have yet to be released, representing only upside." As for the new TV rights deal being negotiated, Routh said it is not unreasonable to expect WWE to procure 2x to 3x what they currently receive in rights fees given the ratings that WWE shows receive. "We think Viacom [Inc.]'s MTV Networks, [NBCUniversal Media LLC], [AMC Networks Inc.], Time Warner [Inc.] (who used to own WCW and owns the Turner Networks) as well as [Walt Disney Co.] and [21st Century Fox Inc.] are likely interested in the rights WWE has to offer," Routh said, also naming Tribune Co. as a possible partner given the company's efforts to transform WGN. "The real question is who will get the rights to WWE programming and how will any such deal be structured?" For its part, WWE also sees great things ahead for itself, and company Chief Strategy and Financial Officer George Barrios told SNL Kagan that he is not too worried about the recent decline in the stock price. "I don't ever comment on the stock price. I let the market do what the market does. I focus more on our strategy and making sure that we're executing it," he said. Instead, he said he is focused on growing the WWE Network beyond the 667,287 subscribers that it reported in tandem with WrestleMania XXX. "In my view, with 670,000 subscribers, if we have them for a full year, that's a $70 million business we created in essentially 39 days," Barrios said. "And that's 40% larger than our domestic pay-per-view business was. So for me it was a homerun out of the gate." This is the second part of a two-part series on WWE. The first part focused on the WWE Network.