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Is World Wrestling Entertainment, Inc. (WWE) Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does World Wrestling Entertainment, Inc. (NYSE:WWE) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.

World Wrestling Entertainment, Inc. (NYSE:WWE)

What we’re looking for
The graphs you’re about to see tell World Wrestling Entertainment, Inc. (NYSE:WWE)’s story, and we’ll be grading the quality of that story in several ways:

Growth: Are profits, margins, and free cash flow all increasing?

Valuation: Is share price growing in line with earnings per share?

Opportunities: Is return on equity increasing while debt to equity declines?

Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let’s take a look at World Wrestling Entertainment, Inc. (NYSE:WWE)’s key statistics:

WWE Total Return Price Chart

WWE Total Return Price data by YCharts

Passing Criteria 3-Year* Change Grade
Revenue growth > 30% (4.2%) Fail
Improving profit margin (69.1%) Fail
Free cash flow growth > Net income growth (100.8%) vs. (70.4%) Fail
Improving EPS (70.3%) Fail
Stock growth (+ 15%) < EPS growth (23.8%) vs. (70.3%) Fail

Source: YCharts. * Period begins at end of Q1 2010.

WWE Return on Equity Chart

WWE Return on Equity data by YCharts

Passing Criteria 3-Year* Change Grade
Improving return on equity (65.8%) Fail
Declining debt to equity No debt Pass
Dividend growth > 25% (66.7%) Fail
Free cash flow payout ratio < 50% Negative FCF Fail

Source: YCharts. * Period begins at end of Q1 2010.

How we got here and where we’re going
World Wrestling Entertainment, or WWE to its shareholders and fans, takes a big piledriver to the mat in this assessment, as it earns only one of nine possible passing grades. A big source of that weakness is the company’s falling free cash flow, which has resulted in slashed dividend payments, and may result in more cuts to come if it can’t return to positive territory. Will World Wrestling Entertainment, Inc. (NYSE:WWE) be able to kick out of the three-count, or is it done for? Let’s dig a little deeper to find out.

Entertainment companies are powerhouses of intellectual property, and they are able to draw on decades of characters, and make profits even during bad times by rehashing old stories or rereleasing old material. When World Wrestling Entertainment, Inc. (NYSE:WWE) has a big hit on its hands, it can virtually mint money. Unfortunately, that hasn’t been much the case lately, as the company’s biggest promotion over the past year was the return of former superstar and current movie star The Rock, who can’t be expected to headline live events all the time as his star continues to rise in Hollywood. As the de facto kingpin of synthetic athletic contests, World Wrestling Entertainment, Inc. (NYSE:WWE) has a pretty solid moat, but there’s always a risk of viewer apathy, as has occurred several times in the past.

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