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Pacific Crest Continues To Recommend WWE, Despite Guidance Miss

Pacific Crest maintains its Overweight rating and $22 price target onWorld Wrestling Entertainment, Inc. and continues to recommend the shares for the company's ability to drive leverage from subscriber additions, strategic value and lack of secular media risks.

Near-Term Catalysts

"We see limited near-term catalysts to drive the shares materially higher or lower," analyst Evan Wingren wrote in a note.

That said, management made it very clear in the call that it would entertain all strategic offers. Also, Wingren views WWE as "a highly attractive asset for a larger media company or financial buyer," and believes it's possible for an acquisition offer/deal to arise "given the volume of content focused on M&A over the past six months."

"In a takeout scenario, we believe that WWE could trade at $27 to $29," the analyst continued.

Meanwhile, a slightly higher subscriber numbers, juxtaposed with higher live events revenue, drove the company's total revenue to $199 million versus Pacific Crest estimate of $179 million.

Subscriber Numbers Push Results

WWE posted ending paid subscriber results of 1.51 million, which was ahead of brokerage's expectation of 1.49 million, but below sell-side consensus of 1.53 million.

In addition, the company's third-quarter average paid subscriber guidance of 1.49 million (+/- 2 percent) was above Pacific Crest estimate of 1.47 million, but below sell-side consensus of 1.53 million.

The analyst expects that the aggregate consumption of WrestleMania (PPV buys and subs) accelerated year-over-year and grew about 20 percent, indicating that WWE can continue to grow its fan base, winning both new and old subscribers.

Gross Adds Dampen Future Outlook

On the other hand, gross adds in the first half of 2016 were flat with last year, an early indicator that subscriber growth will likely begin to drop in 2017.

But, Wingren's bullish thesis on the company stems from "WWE's dominant position with its passionate fan base and ability to segment demand." Moreover, the company's global, 24-hour Internet-based direct-to-consumer network is likely to generate high incremental margins boosting profits.

Wingren also noted that WWE has locked in double-digit television revenue growth with major distributors until 2018 not tied to MVPD subscribers or ratings.

"By segmenting its demand curve appropriately, WWE has captured whale (WWE Network, PPV, merchandise), fish (pay-TV, live events), and minnow (YouTube, digital media) economics," Wingren added.