Is Callaway Golf On Par With Expectations?

| About: Callaway Golf (ELY)

Callaway Golf Co. (NYSE:ELY) makes Big Bertha, its flagship driver named after a WWI cannon. Its business is premium-priced golf clubs, popular with amateurs and professionals. Other drivers include the ERC, Hawk Eye, and Steelhead. Callaway makes fairway woods, irons, wedges, Odyssey White Hot and Dual Force putters, and high-tech golf balls (HX, HX Tour, Big Bertha). The firm, at the top of the worldwide golf market, licenses its name for apparel, shoes, and golf accessories. Callaway purchased the Top-Flite, Strata, and Ben Hogan brands from SHC's bankrupt Top-Flite Golf Company.

You would think there isn't much left you can invent for golf. You'd be wrong. Callaway Golf keeps coming up with new products all the time. In fact, new products are what's giving the company new earnings power, along with cost cutting.

Earnings are the story here. Big Bertha still sells well as do most of the products Callaway offers. For the first quarter, earnings were 49 cents a share, 3 cents better than analysts' consensus. Revenues were up 10.6% to $334.6 million for the first 3 months. Management raised guidance for the full year for 2007 to 72 cents to 82 cents, above earlier numbers of 66 cents to 76 cents. Analysts are predicting 82 cents a share with revenues of $1.07 billion. Last year earnings were 42 cents a share. Next year look for $1.10. Revenues were$1.017 billion last year. Next year expect $1.12 billion.

Earnings don't come in a straight line for Callaway. They're very seasonal with the first two quarters of the fiscal year (ending in March and June) carrying the bulk of the earnings load. For example, in 2006, quarters ending in March and June showed earnings of 33 cents and 38 cents while the quarters ending in September and December had negative results of 8 cents and 10 cents respectively. In other words, people buy their new stuff early in the year, during the winter and spring. And each year, hope springs eternal for a better game when new equipment will be the answer.

The drivers aren't the only thing driving the business. Irons, woods and putters are doing very well. Irons sales were up 16% in the last year while woods revenues increased by 6%. Callaway is number 1 in irons sales with 29% of the market. Since it bought Top-Flite, it eliminated all old inventory and focused on relaunching the D2 brand. It's got a new design, lower price point and a strong marketing campaign behind it.

Other numbers to consider: Return on equity took a deep hit in 2004, going down to 1.3% from 10.4% the previous year. ROE improved since then with 5% last year and an expected 9.5% this year and 11.5% next year. The net profit margin is the same story: way down in 2004 with a recovery pattern. This year it should be 5.6%, next year 7.1%. Current assets outpace current liabilities by over 2 to 1. There is no long term debt. A dividend of 28 cents comes with the stock, giving a yield of 1.6%.

Callaway Golf has been in a rather defined trading range for the last 10 years. It's about in the upper middle of that range now with a definite upward trend. It will keep going higher if the company delivers positive surprises as it did in March. But don't expect every quarter to be better than the last. The seasonality of sales doesn't allow that.

ELY 1-yr chart


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