Callaway Golf (ELY) shares are up over 20% year to date, but still well off highs in the mid $20s from last year. The stock has reported nice gains in revenue this year, but profitability has struggled. The company is the #1 golf club and #2 golf ball company in the world. Here are three reasons to keep Callaway Golf on your watchlist.
1. New Wedges Just Announced
On September 10, 2019, Callaway announced a new set of wedges in the JAWS lineup. The JAWS MD5 wedges are meant to increase spin on the ball due to their aggressive groove design. The wedges will be available for purchase September 20, 2019, and will cost a retail price of $159.99 each.
Golf club sales fell in the most recent quarter for Callaway. The Q2 2019 earnings presentation showed golf club sales declined 3.9% from 232.8M in Q2 2018 to 223.7M in Q2 2019. These new wedges provide a key catalyst for the company to return to growth. We will see how these new wedges do over the next few months and find out more about management’s expectations for the new wedges in the next earnings call.
2. Jack Wolf Skin Acquisition
Apparel sales jumped nearly 200% in the first half of 2019 compared to the same period in 2018. This was due mostly to the Jack Wolfskin acquisition. While revenue thrived, the acquisition was an overall drag on the company’s profitability. First-half EBITDA declined 10% in 2019 to $159.1M from 177.6M in 2018.
Jack Wolfskin could be a key growth avenue for the company going forward, but it may take some time to see it translate into solid bottom line results. Revenue for Jack Wolfskin looks like it may be on the decline this year, not good for what is supposed to bring growth to Callaway.
Callaway took out significant debt to make the Jack Wolfskin acquisition. The market didn’t like the acquisition and reacted negatively by driving down Callaway’s stock price early in the year. The stock has recovered somewhat now but remains well below the highs from before the acquisition.
3. Top Golf Investment
Callaway owns a significant piece of private, yet fast-growing, company Top Golf. This investment could be worth up to $4 per share for Callaway, according to Bloomberg. Rumors of Callaway looking to sell this stake have surfaced recently after the company omitted certain statements on Top Golf from this investor presentation. They even included on slide 5 the statement “Opportunity to realize significant value creation through eventual monetization of TopGolf stake” under a header titled Key Factors in Ongoing Value Creation.
Furthermore, with competitor Drive Shack (DS) moving toward a Top Golf model, competition will be heating up in the space. Drive Shack was able to bring on former Top Golf CEO Ken May as the new Drive Shack CEO, as well as former Top Golf executive Hana Khouri as President of Drive Shack.
Callaway may be taking notice and looking to exit their Top Golf investment to help pay off some debt, or make more acquisitions or investments elsewhere.
Comparing Callaway’s valuation to their closest competitor Acushnet Holdings (GOLF), who own the Titleist and Pinnacle brands, shows that both companies are currently trading at very similar valuations. Callaway is very slightly ahead in EV to EBITDA valuation, but just behind on a P/E basis. The company is likely fairly priced at around 18 times earnings.
Callaway is an interesting company with solid management, but I question the organic growth left in the golf business. The way forward for Callaway appears to be through investments and/or acquisitions. As a growth investor, I’m staying on the sidelines on this one until the company finds more catalysts for growth, or sees existing brands return to higher growth.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.