World Wrestling Entertainment, Inc.'s (NYSE:WWE) price-to-earnings (or "P/E") ratio of 34.3x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 18x and even P/E's below 10x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
World Wrestling Entertainment hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.NYSE:WWE Price Based on Past Earnings October 27th 2021 free report on World Wrestling Entertainment
Is There Enough Growth For World Wrestling Entertainment?
There's an inherent assumption that a company should far outperform the market for P/E ratios like World Wrestling Entertainment's to be considered reasonable.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 6.4%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 165% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.
Shifting to the future, estimates from the eleven analysts covering the company suggest earnings should grow by 21% each year over the next three years. With the market only predicted to deliver 12% each year, the company is positioned for a stronger earnings result.
With this information, we can see why World Wrestling Entertainment is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Key Takeaway
We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that World Wrestling Entertainment maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.
And what about other risks? Every company has them, and we've spotted 2 warning signs for World Wrestling Entertainment you should know about.
If you're unsure about the strength of World Wrestling Entertainment's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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