WWE - Endeavor Group Stock: Dana White Scandal Adds Risks But Possibly Overblown

Summary

• Endeavor Group shares have underperformed over the past year amid broader macro concerns despite overall solid growth and earnings.
• Video of UFC President Dana White seen striking his wife has led to questions regarding his future role in the organization.
• The latest controversy adds to volatility but we believe the company will be able to move forward with an upside in the stock long term.

Endeavor Group Holdings Inc (EDR) manages a portfolio of global sports and entertainment brands including the Ultimate Fighting Championship ((UFC)) as a core asset. The mixed martial arts promotion is embroiled in something of a scandal as UFC President, Dana White, was captured on video apparently hitting his wife.

Beyond a brief public apology from White, Endeavor has yet to comment, and it remains to be seen if there will be any consequences. The stock initially sold off on the news following the New Years' holiday but has remained relatively stable amid the broader market volatility.

UFC Dana White Scandal

The issue here is that Dana White is recognized as the face of the UFC, and a large part of its success over the past two decades as a part owner. From the cellphone footage shared on social media, it appears Dana struck his wife at a public event although no police charges have been filed.

The situation puts Endeavor in a tight spot as part of its strategy since the 2021 acquisition of the UFC has always been to bring a more corporate structure with a higher standard of governance to the company. There appears to be pushback among some MMA industry figures and other celebrities demanding accountability.

The other dynamic considers the UFC's media distribution partnership with "ESPN" through the Walt Disney Co ( DIS ) which is likely sensitive to these types of controversies. The situation could play into a potential contract renewal as the current $1.5 billion deal from 2019 is set to expire at the end of 2023. There have been suggestions the UFC has already been seeking new streaming partners.

With just a layer of irony, a new fighting promotion within Endeavor spearheaded by Dana White known as " Power Slap : Road to the Title" where fighters exchange open-handed blows in a quasi-reality format. The Warner Bros. Discovery Inc ( WBD ) "TBS" network already has pushed back the series premiere by a single week amid the fallout. All in all, there are many moving parts and uncertainties at this point.

How Does Endeavor Move Forward?

One scenario that could still play out is that the headlines simply fade into a footnote in history. Our take is that Endeavor will ultimately move forward and the scandal should not materially impact the value of the company.

We believe the UFC has evolved over the last several years into an institution that is larger in scale and potential than a single person. Over the last decade, several Champion athletes have retired with a steady recycling of talent and that hasn't stopped the group from growing. The reality is that a future for the UFC without Dana White has always been inevitable whether that comes this year or a decade from now.

Here we can draw a parallel to the events at World Wrestling Entertainment Inc. ( WWE ). In this case, its founder and CEO, Vince McMahon was pushed into retirement amid sexual misconduct allegations just last year. Notably, shares of WWE have climbed in the period since, representing a roadmap for how Endeavor as an entertainment company can continue without one of its legacy figureheads.

Again, the ongoing headlines can drive some volatility in the stock, but we're not necessarily worried about a possible leadership vacuum if Dana White steps back at least with a less visible role going from here.

What's more important are the impressive operating trends and earnings forecasts for EDR that highlight the value of the stock as an investment, in our opinion. As it relates to UFC, the business is likely teeing up another record year driven by momentum with pay-per-view events and strong attendance figures, on top of the TV contracts. Other areas of the business including talent representation management have also been solid. That's the backdrop to maintain an otherwise bullish view on EDR into 2023.

EDR Key Metrics

The company last reported its Q3 earnings in November with a non-GAAP EPS of $0.34, up from $0.33 in the period last year, and also $0.06 ahead of estimates. Keep in mind that the GAAP net loss of -$0.04 per share included various one-off charges related to recent acquisition costs and along with a recognized impairment on its "Learfield IMG College" investment.

The takeaway here is underlying profitability by Endeavor evidenced by adjusted EBITDA reaching $303 million, up from $283 million in Q3 2021. The 24.8% margin this quarter also increased from 20.4% in the period last. The year-to-date data through Q3 captures the stronger more normalized trend.

The momentum has been driven by the organic top-line strength with net revenue at $1.2 billion, which climbed by 15% excluding the lost contribution from the sale of the company's "Endeavor Content business" in January last year. This factor is responsible for much of the quarterly noise among the growth metrics for 2022.

By segment, "Owned Sports Properties" which includes the UFC along with events like the "Professional Bull Riding" league, and "Diamond Baseball Holdings" reached $402 million in revenue, a 39% increase from Q3 2021 based on higher media rights fees.

From the "Events, Experiences, and Rights" group, sales were down -1% y/y but largely related to the timing of major sporting events that do not occur annually like "The Ryder Cup", and "The UEFA Euro Championship". In the "Representation" segment, strong demand for its talent management services reflects a recovery of music and comedy touring.

In terms of guidance, the company is targeting full-year 2022 right around $5.3 billion including the yet-to-be-reported Q4 results. If confirmed, the trend represents a headline 4% increase from 2021, although the organic figure is closer to a 21% increase going back to the restricted Endeavor Content business that was sold. Similarly, the target for full-year adjusted EBITDA at a midpoint of $1.16 billion is on track to trend 32% higher from 2021. This figure was also revised higher by a marginal $10 million at the midpoint compared to the prior estimate.

EDR Earnings Growth in 2023

Looking ahead, what stands out is the consensus forecasts for 2023 where Endeavor is expected to generate sales growth above 10% while earnings re-accelerated by 29% to $1.46. Within this figure, a large portion of the growth comes from the media contrast that ramped up the annual values, including the final year of the UFC deal with Disney.

By this measure, there is relatively good visibility of the runway although the usage of these estimates will depend on how well more variable components perform like live event attendance and pay-per-view ((PPV)) numbers which are difficult to predict.

That being said, it's been confirmed that the PPV price on the "ESPN+" app in the U.S. is climbing by $5.00 to $79.99 . While this funnels down as a more direct revenue component for Disney to cover its media distribution contract, the UFC also receives a portion of the total event draw, with a stronger-than-expected performance part of the bullish case for the stock.

We mentioned some of the UFC superstars. The possibility that "Conor McGregor" and " Jon Bones Jones " return to the cage following multi-year layoffs would represent a boom for the business incremental to a full slate of scheduled events .

In terms of valuation, we'll note that Endeavor trades at a discount to a peer group of other entertainment and sports management companies. Its EV to forward EBITDA multiple of 9.5x compares to 12x for Live Nation Entertainment Inc ( LYV ), 13x for the aforementioned WWW, while brands like Manchester United plc ( MANU ) and Madison Square Garden Sports Corp. ( MSGS ) have higher spreads. One explanation here is EDR's relatively high debt position, even as the company intends to deleverage going forward. The dynamic is also evident in its forward P/E ratio of 15x on the 2023 consensus EPS.

EDR Stock Price Forecast

Putting it all together, we see room for EDR to trade higher over the next year through the combination of continued growth and positive earnings. With a belief that UFC has a positive long-term, the sense is that the brand potential has further room to expand globally and generate value for Endeavor shareholders. The selloff in shares over the past years has helped to improve the reward-to-risk setup.

We rate EDR as a buy with a price target of $27.50 for the year ahead, which take the stock back to levels from Q1 2022. Our price target implies a 19x multiple on the current consensus 2023 EPS which would help EDR's valuation spread converge higher toward segment peers.

Shares have been consolidating around a relatively tight range since the first half of 2022, and some of the concern goes back to the macro environment. A deterioration of economic conditions with consumer spending under pressure could hit demand for its entertainment with weakness in live events attendance and even PPV buys. This side of the discussion is like the biggest risk through 2023 again challenging economic conditions.

From there, the baseline is to expect more volatility in the near term with the Dana White saga still a fast-moving situation. Into the Q4 earnings report, cash flow trends, EBITDA margin, and 2023 guidance will be key monitoring points.

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