ValueXVail 2013 - MS

2013
Investment Basics
Easy To Understand Strong Moat Strong Balance Sheet Owner Operator Generous Dividend Hidden Asset Limited Analyst Coverage Limited Public Float Temporary Problem
Stock Basics
Stock Symbol Stock Price Class A Shares Class B Shares** Market Cap Cash Debt 52 Week Range Dividend Yield WWE $9.90* 29,771,977 45,050,830 $741 M $132 M $0 $7.44 - $9.99 4.8%
WWE
$20
$18 $16 $14 $12 $10 $8 $6 $4 $2 $0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Last Px
* As of 6/14/2013 ** Controlled by the McMahon Family
The Core Business
Company History
1926 - "Toots" Mondt starts Slam Bang Western Style Wrestling 1952 - Mondt partners with boxing promoter Jess McMahon to form Capital Wrestling Corp (CWC) 1953 - The CWC pledges to the National Wrestling Alliance (NWA) which coordinated activities between regionally focused groups 1954 - Vince McMahon Sr takes over for his father Jess and builds the CWC into the dominant wrestling promotion in the North East 1963 - McMahon Sr and Mondt leave the NWA and form the World Wide Wrestling Federation (WWWF) 1979 - WWWF renamed World Wrestling Federation WWF 1982 - Vince McMahon Jr. buys the company from his father, secretly planning on abandoning the traditional regional model and building a national wrestling power house. McMahon starts signing all of the biggest regional stars and negotiates television deals, upending the traditional regional model. 1985 - McMahon catapults WWF onto the national stage with Wrestlemania, which incorporated mainstream entertainment with wrestling
focus is Sports Entertainment which incorporates stars from music, sports and film world
1993 - Monday Night Raw is launched as live programming 1999 - IPO 11.5M shares $17 Mid 90's 2001 - WWE and WCW go head to head and destroy each other's profits 2001 - WWE buys WCW and solidifies their position as the dominant wrestling brand
Key Takeaway: WWE survived a period of brutal competition and emerged as the dominant force in professional wrestling. Other remaining brands are essentially minor league players.
Main Drivers
Live Events / Television
240 260 domestic events, 70-80 international events per year ~1,800,000 people attended a live event in 2012 Average Ticket Price $44 6.5 hours of original programming per week. RAW on USA Network (Replayed on mun2 and Universal HD) SmackDown on Syfy (Replayed on mun2) WWE Main Event on Ion Saturday Morning Slam on The CW 12,000,000 US viewers per week
2012 Revenue: $484M

7% 2% 18%
73%
Live and Televised Digital Media Consumer Products WWE Studios
Pay Per View

10-12 mega events per year $44.95 normal events $54.95 Wrestlemania More than 4,000,000 buys in FY`12
2012 Profit Contribution

7% 26%
Other
Merchandise Sales Video Games (TTWO replaced THQ) Online Video ($1.5B YouTube Views)
Live and Televised Digital Media
67%
Consumer Products
Customer Behavior
Fan: noun \fan\
an enthusiastic devotee (as of a sport or a performing art) usually as a spectator An ardent admirer or enthusiast Probably short for fanatic Food for thought How many businesses have customers that paint their faces and make signs before patronizing the business?!? 36% 64%
Male Female
21%
33%
24% 22%
50+ 35-49 18-34 <18
Source: www.merriam-webster.com
Customer Behavior
Event Cost for a Family of 4 Nascar $329 NFL $314 NHL $244 NBA $204 Theme Park $199 WWE $176 MLB $108 Movie $32 No chance to go to the next game Less supply = easier to pass on ticket price increase Difficult to say how much drops to the bottom line (flat fee vs % of door) WWE television has a highly attractive demographic making future increases in broadcast rights likely Local Opportunities Per Year Nascar ? NFL 8 NHL 41 NBA 41 Theme Park WWE 1-2 MLB 81 Movie
Prime Time Viewers (000))

4,738
3,041 3,005
2,418
2,376
2,251 1,456
Source: MPAA, ISCA, Nielson and WWE Investor Presentation
Why is it Cheap?
Perception:
Live Entertainment is Dying Shift to social entertainment (Facebook etc) New Threats (UFC)
UFC went main stream with Griffin vs. Bonnar 1 in April 2005 WWE revenues and core earnings have remained consistent Proxy for Nascar Revenue down 25% from pre crisis peak and forecast to stagnate WWE revenue down 6% from pre crisis peak and forecast to exceed in 2014
Poor Comps (ISCA)
Reality:
Key Metrics are Strong 1.5B YouTube views, 150M Facebook and Twitter followers Cyclical Element
Events per year varies Emergence of new stars WWE Studios WWE Network
New Ventures Obscure the Strength of the Core Business

WWE $44 ~10 ~300 Yes No!
Spoiler Alert! vs UFC Average Ticket $250+ PPV / Year ~16 Events / Year ~30 Sports Soap Opera? No Real? Yes
Key Takeaway: Worth Keeping an Eye On
What is the Core Business Worth?

Normalized EPS / Share ~.65 - .70 Cash Adjusted Average P/E 17.6x Range ~$11.44 - $12.32 Cash / Share @ 75%* ~$1.31 Intrinsic Value Estimate ~$12.75- 13.63 Current Price Implied Upside $9.90 29% - 38%
Adjusted Revs Adjusted Cost of Revs Adjusted SG&A Adjusted D&A Adjusted EBIT Adjusted EBT Adjusted Taxes Adjusted NI Adjusted EPS Vs GAAP EPS
600 500 400 300 200 100 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Revenue Diluted EPS Adjusted EPS
2012 2011 476,113 463,021 275,654 275,441 124,641 105,239 15,024 14,980 60,794 82,341 60,283 82,203 15,891 26,856 44,392 55,347 0.60 0.75 0.42 0.33
$0.80 $0.60 $0.40 $0.20 $0.00 -$0.20 -$0.40
Average multiple may be too low due to:

Dominant Consumer Brand Rising Value of Content Ability to Raise Prices $0 Debt Low Maintenance CapEx ($9-$13M 08-12) Relatively Recession Resistant High Dividend(Average 70% FCF Payout 08-12) International Growth
Average P/E = 2003-2010 based on annual hi/low price * Cash / share is shrinking Adjusted = Backing out the effects of losses and investments tied to WWE Studios and a WWE Network
What is the Core Business Worth?

Another Way to Look at Valuation. [Consistent revenue and a lower than average price to sales can be a sign that management is sacrificing short term profit margins in order to invest for the future.] ~ Kenneth Fisher, Super Stocks 2012 Revenue Net of Film Business(000) Fully Diluted Shares (000) Rev/Share 10 Year Average P/S Intrinsic Value Estimate
600
10 Year Avg P/S = 2.11x
3.5 3 2.5 2 Price/Sales
$476,113 74,981 $6.35 2.11x $13.40
500 400 Revenue 300
1.5 200 100 0 1 0.5 E 0
Current Price
Implied Upside
$9.90
35.5%
2007
2003
2004
2004
2005
2005
2006
2006
2008
2008
2009
2009
2010
2011
2011
2012
2012
Revenue
P/S
10 Year avg P/S
Paraphrased from Super Stocks, Kenneth Fisher, 2007
2013
The Problem Businesses
Owner Operator - The Strength to Invest for the Future

Entrepreneurial instinct equates with sizable equity ownership. Martin Sosnoff, Silent Investor, Silent Loser
Owner-operators put money to work in times of trouble vs agent-operators. See The Outsiders by William Thorndike
The Journal cites a 2003 study of the companies in the S&P500. Family firms as being more profitable than non-family controlled firms. (In Search of Family Ties) McVey and Draho (2005) Looked at companies controlled by families and found they avoided quarterly earnings guidance, focused on long-term value creation and outperformed their peers. Lilienfield-Toal and Ruenzi (2009) - Firms in which the CEO voluntarily holds a nontrivial fraction of the companys stock outperform the market significantly after controlling for traditional risk factors.
Chris Mayers Presentation from the Value Investing Congress 5/6/13
Non Core Business: WWE Studios

The Earnings Power of the Core Business is Obscured By WWE Studios Basic Strategy: Leverage recognizable WWE Superstars into films using free in programming promotion Strategy makes sense on the surface, but it has been a consistent loser
Title Self - Distributed films Barricade No Holds Barred Bending the Rules The Reunion Inside Out That's What I Am The Chaperone Knucklehead Legendary Release Date Sep-12 Jul-12 Mar-12 Oct-11 Sep-11 Apr-11 Mar-11 Oct-10 Sep-10 Production Costs* $4 5.5 6.9 5.1 4.7 5.8 6.4 5.3 43.7 Revenue 0.8 0.4 0.9 2.1 1.6 0.9 4.2 4.3 6.6 21.8 Profit (Loss) (3.5) 0.1 (4.7) (4.7) (3.8) (5.0) (3.8) (4.1) (2.1)
(31.6)
Source: 2012 10K
The Solution
Old Strategy: Straight to Walmart New Strategy: Partner with movie industry pros to make higher quality films, with recognizable main stream stars and WWE stars in supporting roles. The Call 2013 release starring Halle Berry Dead Man Down 2013 release starring Colin Farrell Scooby Doo! Legend of Wrestlemania 2014 Release Untitled WWE & Flintstones movie 2015 Release
If That Doesnt Work?

If the new strategy new film strategy does not work, we probably, in all likelihood, would be out of the film business.
~ Vince McMahon, CEO 2/23/12 Q4 2011 conference call We're not going to put good money after bad ~ Vince McMahon, CEO 2/23/12 Q4 2011 conference call While we are confident that our revised approach to filmed entertainment will yield significant returns above our cost of capital, we have also established criteria that will guide our level of participation and potential exit from the business. The future investment will be predicated on the evaluation of our performance in 2013 in this business. ~ George Barrios, CFO - 2/28/13 Q4 2012 con call
Non Core Business: WWE Network

Earning Power of the Core Business Obscured By Investment in a WWE Network Basic Strategy: Leverage existing content library and production facilities to make low cost content for a cable channel Hidden Asset WWE Owns the Rights to Almost All Video Taped Professional Wrestling Ever Filmed More than 100,000 Hours ~30% digitally catalogued by SuperStar, technique, theme, etc Quick and cheap to create new shows
Example Best of Body Slams only requires searching the library for body slams
Balance Sheet Value = $0
Hidden Asset is Worth Less Than Nothing?

Trouble Getting Off the Ground Originally.
You don't want to start a network unless you have a major partner. ~Vince McMahon, Q4 2011 Conference Call We're going to launch sometime this year. There is no specific date. ~Vince McMahon, Q4 2011 Conference Call
The Latest
Regarding the potential WWE network, we believe that a premium subscription model is the best approach ~George Barrios, Q4 2012 Conference Call We're optimistic, but we're going to get out of predicting dates. ~George Barrios, Q4 2012
What We Do Know
Proposed price per month $12.99 - $14.99 Includes Some Pay Per View, but Not Wrestlemania Would Reduce but not Eliminate Cable Programming Break Even Estimated at 1M Subscribers (Domestic) Middle of Managements Range = 3M Subscribers $130 - $200M Revenue Estimate Incremental OIBDA $75 - $155M

What We Dont Know
Will The Network Work??

Impossible to know, but if it does, it will be transformational STRZA trades @ ~6x OIBDA Midpoint of WWEs network OIBDA guidance at 4x = ~$6/share
Key Take Away: Success of the network is not necessary for an investment in WWE to succeed. If the network is a money loser, the highly incentivized owner operator will shut it down, allowing the strength of the core business to shine through. If the network succeeds, it is a free lotto ticket.
<Q - Michael A. Kupinski>: And so then technically, six months after the launch, you would be determining whether or not you would want to go forward with the launch, is that correct? <A - George A. Barrios>: Yes, I think in 6 to 12 months you'd have a good idea as, hey, is the current offering working or not. And I think at that point, you have a myriad of decisions to make, but I think you will have a pretty good idea. Q1 2013 Conference Call We're not going to put good money after bad ~ Vince McMahon, CEO 2/23/12 Q4 2011 conference call
Risks
Management
Highly promotional Empire building?
History of cutting losses (XFL, Restaurant, etc)
Do I look like the CEO of a $750M Company?
Cannibalization
Not clear how the WWE Network will conflict with existing programming
Dividend Sustainability
Currently out spending FCF
$35.8M spent on dividend in 2012 3 year average FCF of $30M
Large cash cushion In 2010 and Q1 2011 McMahon family dividend is cut to $.24 while outsiders remained at $.36 2011 entered into unused $200M Senior Unsecured Revolver. Expires September 2013
UFC
Stealing fans?
Summary
At current prices an investment in WWE is an investment in:
A dominant consumer franchise set to benefit from the rising value of content at an approximate 35% discount
A 4.8% dividend yield A movie business that will either increase earnings or be killed by 2015 A lotto ticket in the form of a TV network that will either increase earnings or be killed by 2015
Key Takeaway: By 2015 WWE will either have greater earnings power or the core business will be allowed to shine through

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2013

* As of 6/14/2013 ** Controlled by the McMahon Family

The Core Business

2012 Revenue: $484M

Pay Per View

2012 Profit Contribution

Prime Time Viewers (000))

Source: MPAA, ISCA, Nielson and WWE Investor Presentation

Poor Comps (ISCA)

New Ventures Obscure the Strength of the Core Business

WWE $44 ~10 ~300 Yes No!

Key Takeaway: Worth Keeping an Eye On

What is the Core Business Worth?

Average multiple may be too low due to:

What is the Core Business Worth?

10 Year Avg P/S = 2.11x

3.5 3 2.5 2 Price/Sales

$476,113 74,981 $6.35 2.11x $13.40

500 400 Revenue 300

1.5 200 100 0 1 0.5 E 0

10 Year avg P/S

Paraphrased from Super Stocks, Kenneth Fisher, 2007

The Problem Businesses

Owner Operator - The Strength to Invest for the Future

Chris Mayers Presentation from the Value Investing Congress 5/6/13

Non Core Business: WWE Studios

Source: 2012 10K

If That Doesnt Work?

Non Core Business: WWE Network

Balance Sheet Value = $0

Hidden Asset is Worth Less Than Nothing?

Non Core Business: WWE Network

Non Core Business: WWE Network

Will The Network Work??

Do I look like the CEO of a $750M Company?

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