Callaway Golf: Updating Earnings Model, Maintaining EPS Estimate

Excerpts from Gilford Securities analyst Casey Alexander's recent note to clients on Callaway Golf (ELY):

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Callaway Golf Company and its subsidiaries engage in the design, manufacture, and sale of golf clubs and golf balls in the United States and internationally. Its products include drivers, fairway woods, irons, wedges, and putters. The company also sells golf accessories, such as golf bags, golf gloves, golf headwear, travel covers and bags, golf towels, and golf umbrellas. In addition, it sells footwear, through its subsidiaries. Callaway Golf sells its products to golf retailers, sporting goods retailers and mass merchants, and third party distributors. The company’s international sales are made through its wholly owned subsidiaries located in Europe, Japan, Canada, Korea, and Australia; and through distributors in approximately 65 foreign countries. Callaway Golf was incorporated in 1982 and is headquartered in Carlsbad, California.

1. Updating the Earnings Model Due to the Pre-Release

We are updating our earnings model due to the pre-release of preliminary 2008 full year results. Callaway reported preliminary results with Q4 revenues $4 million below our recently reduced estimate. Q4 and Full Year EPS were in line with our estimate and Street consensus.

Callaway also was finally allowed to reverse the energy derivative valuation account that had been established back in 2001 due to the cancellation of a long term energy supply contract. This resulted in a one-time gain of $0.22 after tax.

2. Comments on the 2009 Outlook

In the release, Callaway management discussed the significant headwinds that had arisen from the dramatic change in foreign exchange rates. Some of these changes as they presently stand would actually help Callaway, and some would hurt. Undoubtedly the $US dollar has been strong, especially against the Euro, and European sales were 18% of the total revenue through three quarters of 2008. But the Japanese Yen has also been very strong compared to the $US Dollar, and Japan comprised 14% of total sales through three quarters of 2008. So there is at least some offset there. We do not present ourselves as any type of foreign currency expert, and we are certain that overall there is a negative impact. But we felt it was necessary to suggest that there may be somewhat of a buffer.

3. Maintaining 2009 EPS Estimate and Buy Rating

For the time being we will maintain our 2009 EPS estimate of $0.92 per share. We will also maintain our Buy Rating. We still will defer on a price target until such time as we have a chance to listen to the conference call next week and also after having a chance to attend the PGA Merchandise Show next week.

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ANALYST CERTIFICATION

I, Casey Alexander, certify that all the views expressed in this research report accurately reflect my personal views of the subject company. I also certify that I have not and will not receive compensation with respect to the issuance of this report.

Comments

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