Callaway Golf Company (ELY) is engaged in designing, manufacturing and selling golf clubs (drivers, fairway woods, hybrids, irons, wedges and putters) and golf balls. It also sells golf accessories, GPS rangefinders, golf bags, gloves, footwear, apparel, headwear, eyewear, towels and umbrellas, under the Callaway Golf, Odyssey, Top-Flite, Strata and uPro brand names. Callaway sells its products to retailers, directly and through its wholly owned subsidiaries, and to third-party distributors. You can learn more about the company via their website as well as through their investor relations site. It operates its own online store where consumers can place custom orders for Callaway Golf, Top-Flite and Odyssey products. In addition, Callaway also sells pre-owned golf products through an exclusive website.
Shares of Callaway have not done well over the past few years. The golf industry was hit harder than most during the Great Recession, and is only recently showing signs of improvement. Golf is an expensive sport to play - the price of clubs, clothes, bags, accessories, and green fees/club memberships can quickly add up. In an economy where incomes are down, unemployment is up, and budgets are tight its only natural to see a discretionary industry such as gold suffer. Investors have also been leery to pick up shares of ELY due to their recent swing to annual losses in 2010 and 2011, almost driving them to bankruptcy. However, with an improving economy, a new CEO executing a great turnaround plan, and the golf industry finally picking up, Callaway Golf looks to be a solid investment choice and on track to returning to its glory days of the 1990s.
Basic stats about shares of ELY (as of 12/9):
|Avg. volume (10 day)||1.05M|
|Dividend (Qtr) / Yield||$0.01 / 0.51%|
From "Tour Pro" to "30-Handicapper"
For the better part of the past 30 years, Callaway Golf has been the industry leader that other competitors in the golf equipment industry emulated. Much of that success can be attributed to founder Ely Callaway, whose name is forever remembered by the company ticker "ELY." He was an innovator who revolutionized the golf equipment industry in the 1990s by introducing a number of long-hitting drivers and easy-to-hit irons. Their legacy lines such as the "Big Bertha" drivers, "Steelhead" woods, Odyssey putters and "X" series irons have long been favorites of tour pros and the average consumer alike. Under Ely's leadership, the company had consistently been one of the brightest and best innovators in the industry, amassing one of the largest patent portfolios in golf, rivaled only by Ping. They pioneered the use of multiple different materials in driver heads. Notable firsts include the first use of titanium in a driver, the first use of carbon fiber in a driver to decrease weight, the first use of a "cup face" in a metalwood, and the first "square" shaped driver. They also led the way to the 460cc driver head size era by introducing larger sized driver heads than any other company on multiple occasions.
Ely passed away in 2001, however. And along comes the "era of adjustability" in golf brought about by current industry leader - TaylorMade Golf (owned by Adidas Group). This began back in the mid-2000's and really has caught on in the past few years. Callaway has been one of the last equipment manufacturers to embrace the adjustability concept in golf clubs and therefore showed substantial decline in revenues since hitting their peak of $1.12 billion in 2008. 2008 also brought us "The Great Recession" further adding to Callaway's recent troubles as well as the overall golf industry.
Once the premier brand in all things golf, Callaway has suffered through declining revenues and all time lows in share price over the past 4 years. A turnaround was desperately needed to save the company from the brinks of bankruptcy as they were burning through cash from yearly net losses in 2010 and 2011.
In steps former Adams Golf executive Chip Brewer, was promoted to CEO of Callaway Golf in March 2012. With Adams Golf, chip played an important role in growing a small, little-known company on the outskirts of the industry to a large corporation that was recently purchased by TaylorMade Golf. In 2000 Adams Golf hit rock bottom, posting a record loss for the year. Brewer took the reigns from there and had the company posting profits only two years later, as well as remaining profitable for all but 2 years during his tenure. He has a tremendous business mind thanks to degrees from William & Mary as well as Harvard, and knows the golf industry well thanks to his time with Adams over the past 15 years.
Since taking the helm at Callaway, CEO Brewer has designed and undertaken a turnaround that is rooted in the company's early successes - innovation and the "long ball". Brewer quickly challenged the R&D teams at Callaway to come up with a fairway wood to rival competitor TaylorMade's "Rocketballz" launch last year, which resulted in the "X Hot" line of fairway woods. These were met with much praise and have helped to revitalize the brand name as it looks to return to its former glory days.
Early Signs Point To Success
While CEO Brewer initially cautioned that a turnaround in Callaway would likely take a few years to fully implement and come to fruition, as well as depend heavily on the improving economy, early signs point to the fact that the efforts are actually ahead of schedule. Revenues were not growing at all when Brewer began his turnaround plan, but most recent Q3 earnings reports showed a 20.5% increase over the previous year. That's a positive sign that things are working at Callaway. Shares of ELY are also up 22% since Brewer was announced as the new CEO.
Furthermore, CEO Brewer made a large push in July 2012 for Callaway to implement a cost reduction program, a great way to restore some profitability during periods of declining sales. Callaway has succeeded already in divesting some of its least profitable business lines by selling the rights to the Top Flite golf ball brand to Dick's Sporting Goods (DKS). It also sold its Ben Hogan brand and licensed out its apparel line to Perry Ellis International (PERY). These and other efforts have helped transform ELY into a leaner company set to focus on their core product lines.
Most recently, Callaway posted a tremendous Q3 earnings beat in which sales and margins were both up, while expenses were down. They also raised yearly guidance of both sales and EPS, looking for 2013 to be the first year since 2008 where they post positive yearly earnings.
Improving Analyst Sentiment
A number of analysts and investment publications have been upgrading shares of Callaway this year, including most recently after the Q3 earnings beat.
- DA Davidson upped ELY shares to a "buy" and gave them a price target of $11.
- Barron's Imperial Capital has ELY at "outperform" citing future growth prospects
- Bloomberg thinks ELY could be an M&A or buyout target for a larger company like Nike, with many fund managers calling Callaway a buying opportunity and a "valuable brand name."
Average Broker Recommendation "ABR" for ELY shares currently is 1.83, up from 2.29 three months ago. 3 analysts rate ELY a "strong buy" with 1 "buy" and 2 "hold" ratings. Average analyst target price is $9.00 - suggesting a current 15% upside from market prices. (source: Zacks) I would expect continued upgrades and target price increases if Callaway posts another great quarterly result in February like the previous one.
2014 Product Line Is Callaway's Best In Years
The future looks bright as Brewer's pushing of the R&D departments is paying off. They've recently introduced multiple new product lines that appear to be their most innovative in years, including a return to the "Big Bertha" era of drivers and Hogan's famous "Apex" irons. These have all been met with wide praise by consumers and the golf media alike.
Reading some of those articles and taking a look at the pictures you will see that CEO Brewer has Callaway very focused on adapting their equipment to meeting new consumer demand. They are showing continued innovation and sales reps are currently out in full force at trade and road shows - showcasing the new product lines to retail stores and consumers alike.
Also worth noting is that the success of golf equipment manufacturers can be somewhat attributed to the sponsored professionals who use them. Callaway has been increasingly aware of this and their marketing efforts have led to signings of some of the youngest and longest hitters on tour, a tactic that has paid off for TaylorMade Golf for years. Notable players currently under contract to play Callaway Golf equipment for the 2014 golf season are:
- Phil Mickelson (#5 in world rankings, multiple major winner, hall of famer, and 2013 Open Champion)
- Jim Furyk (#18 in world rankings, major winner, 2011 Fedex Cup Champion)
- Henrik Stenson (#3 in world rankings, 2013 Tour Championship winner, 2013 Fedex Cup Champion, hottest player on the planet right now...)
- Gary Woodland (one of longest hitters on tour)
- Ryo Ishikawa (most popular Asian player in the world)
- Trevor Immelman (former Masters champion)
- Nicholas Colsaerts
- Tommy "Two Gloves" Gainey (former Big Break winner)
- Fredrik Jacobson
- Luke List (longest driver on 2013 PGA tour)
Callaway Golf is currently an attractive investment in the golf industry. Shares of ELY trade at low multiples in terms of price/book (1.7) and price/sales (0.7). Shares are still attractively priced, especially after the recent drop since the Q3 earnings beat spike last month. RSI is below 30 and trading volumes are low the past week, indicating they are oversold and a great entry point.
Current CEO Chip Brewer has demonstrated to be effectively turning around the company and returning them to their glory days of the 1990s/2000s when the stock price consistently traded near its all time highs of $20 and revenues were growing rapidly. Sales reps are out in force promoting a new product line that is one of Callaway's best ever, and showcases some of Callaways recent innovations to once again set them apart in the industry.
As the economy continues to improve, so will the golf industry. Now is the best time to buy shares of Callaway - during golf's "offseason" when no one is paying attention to the industry and ELY shares - and hold for a great return after next summers revenues show continued growth and analysts upgrade shares again. I see shares trading around $11 next summer, and Callaway raising its dividend once it becomes profitable again in 2014.