Despite Appearing Cheap, Wait For Q1 Earnings Before Taking A Swing At Callaway Golf

| About: Callaway Golf (ELY)

Callaway Golf clubs have been a mainstay in golfer's bags for years, but does Callaway belong in your portfolio as well as your golf bag? Callaway Golf Co. (NYSE:ELY) has been trading very poorly ever since the economic downturn in the United States a few years ago. Their shares have fallen from a five year high of $19.50 in 2007 to their recent price of roughly $6.75, a drop of nearly 66%. After posting three straight years of losses, and the U.S economy in the midst of a turn- around, are Callaway shares now poised for a turn-around too? The street may think so as the stock has already risen 19% in 2012.

Callaway Golf is a Carlsbad, CA based golf club manufacturer. Together with its subsidiaries, Callaway Golf designs, manufactures and sells golf clubs, golf balls, and various golf accessories. The company owns golf brands such as Callaway Golf, Odyssey, Top-Flight and U Pro. Callaway Golf 's primary competitors are other golf equipment manufacturers such as TaylorMade Golf, Cleveland Golf, and Accushnet Golf. Callaway Golf has a market capitalization of $436 Million, and annual sales of $887 Million.


Gross Profit Margin


Operating Profit Margin


Net Profit Margin


The company has a positive gross profit margin of 35% which is in-line with the rest of the recreational products sector. However the company has negative operating and net profit margins, which shows that the company's expenses are far outweighing their revenues. Much of their expenses come from increased marketing and advertising costs surrounding their new product line.

Share Price Valuation

Price to Book Ratio


Price to Sales Ratio


P/E Ratio


Forward P/E Ratio


Based on these valuation techniques, shares of Callaway Golf look to be relatively inexpensive. However after posting three straight years of losses, the shares may be deservedly cheap. The stock is currently trading well below book value, and at nearly 50% of their sales. Since the company posted a net loss in 2011, the stock's current price to earnings ratio is a negative figure. However the stock's forward price to earnings ratio is a positive number, implying that the projected earnings over the next four quarters will be a positive figure.

Callaway Golf's most recent earnings showed a narrowing loss per share of $1.01. During the latest earnings conference call, Callaway Golf CEO Tony Thornley had many positive things to say about the quarter. He was pleased with the company's achievement in reaching their $50 million savings target, and he expects the company to post a profit in 2012.

In the meantime Callaway Golf seems to be in a safe financial position - they have a positive cash flow of thirteen cents per share, which covers their four cent dividend, and currently have zero debt on their Balance Sheet. Looking forward I think there are many bright spots ahead for Callaway Golf. For example nearly 50% of their revenues come from within the United States, and only 13% comes from Europe. With the ladder facing a recession, the fact that the majority of their revenues come from an economy whose economy is currently recovering is a positive.

The recovering U.S economy is also a bright spot for the company as the golf industry is closely correlated to discretionary spending, which as you can imagine has been at a low level over the past few years. The company has also spent much of 2011 focusing on cost- savings, which combined with an increased demand could have a very positive impact on their future earnings.

Although Callaway Golf shares look extremely inexpensive at this level, you must also keep in mind that they have not shown a profit in three years. I do feel that Callaway Golf can turn their business around post a net profit this year, but since the stock has already moved heavily this year, I would wait for a confirmation in Q1 earnings before entering a new position.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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