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On The Ropes?

Posted: Sep 24, 2007 16:04 PM by Matthew McCall

Tickers in this Article: WWE

The body slams and flying elbows may be fake, but World Wrestling Entertainment (NYSE:WWE) is facing some very real problems at the moment.

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History of Violence
More than a few people watch the WWE matches. The company's programming is distributed to 100 countries and is available in 13 languages. Although, recent events may have finally been too much for some of their loyal followers - recently, one of their big-name wrestlers, Chris Benoit, murdered his wife and child before taking his own life.

The Benoit tragedy is one of a number of tragic deaths that have occurred over the years at WWE. The WWE is under the proverbial microscope, as people begin to ask if the deaths were related to substance abuse or are tied to steroid use.

In 2006, the WWE implemented a broad WWE Talent Wellness Program which includes drug testing along with cardiovascular testing. It didn't get much attention. Then there was the Benoit tragedy and a request from Congress, and suddenly the suspensions began to be imposed. In late August, the WWE suspended 10 of its wrestlers due to failing the "wellness" program.

Inside the Numbers
In the company's most recent earnings release for the second quarter, it announced revenue grew 15% to $137.5 million from $119.3 a year earlier. However, operating income fell to $9.7 million from $21.4 million in 2006. Net income also fell to $7 million or $10 cents per share from $14.7 million or 21 cents per share last year. The company stated earnings were hurt by a $15.7 million impairment charge for its feature film "The Condemned" which flopped at the box office. (To learn more, check out the appropriately movie-themed Impairment Charges: The Good, The Bad And The Ugly.)

While the most recent earnings release may not be promising, there were some financial highlights in the report. For example, the most recent Wrestlemania broadcast attracted the largest number of viewers to date. Maybe the scandals and scripted storylines are in fact what the world wants to watch.

Ultimate Competition
That said, not only is the WWE dealing with in-house issues, it is also looking in the rear-view mirror at the up-and-coming Ultimate Fighting Championship (UFC) series. The UFC is just as violent as the WWE, the major difference is that the UFC is real and the matches are not scripted. The popularity of the UFC has become so widespread that it is now taking away viewers of the WWE as well as professional boxing.

The sport of ultimate fighting has only been mainstream for about five years and it already has a strong hold on the market. In another five, the WWE may be just an afterthought.

Keeping it in the Family
A family-run business can be great in certain situations, but when they begin to grow it is often time to step aside and let someone qualified to run the day-to-day operations. The McMahon family still controls WWE and the head family member, Vince McMahon, controls 98% of the voting power. With McMahon's absolute control over the company, shareholders in WWE face the risky proposition of McMahon holding on to his control of the company instead of handing off the reins to the most qualified person.

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By Matthew McCall

Matthew McCall is the president of Penn Financial Group, LLC, a registered investment advisor. He also publishes two newsletters, The ETF Bulletin and The PFG Letter as well as other educational material. As a registered investment advisor, he manages clients' investments based on their specific goals and objectives.

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