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Callaway Golf Is Cheap Enough - If The Strategy Is On Point

Vince Martin profile picture
Vince Martin


  • ELY shares have stumbled after a long bull run, capped off by a 9%+ decline after the acquisition of German apparel manufacturer Jack Wolfskin.
  • The deal moves the company heavily into the outdoor apparel space - and limits the importance of the legacy golf business.
  • Given the company's success in golf, the move seems to add risk - and to suggest that management sees the industry on the whole as tapped out.
  • But if management is right, there's a nice path toward years of above-market performance for ELY.

As it turns out, the only thing that could stop Callaway Golf (ELY) stock was Callaway itself. A successful turnaround in the golf business in the first half of the decade was followed by impressive market share gains in the last two years. Callaway raised guidance after each of the first three quarters in 2017 - then did the same in 2018. ELY shares soared as a result, nearly tripling between early 2016 lows and 2018 highs.

While the stock did sell off a bit after Q3 results in late October, a weak broad market likely didn't help. But the declines accelerated in November, capped off by a 9.4% decline after the company announced its acquisition of German outdoor apparel company Jack Wolfskin for $476 million.

The drop to a six-month low leaves ELY in an interesting position. Valuation pro forma for the acquisition still looks reasonably stretched. Performance over the past few years seemingly has disproven the concerns I've called out regarding the golf business. But Callaway still has the largest share in what likely is a flattish market (maybe at best), and the acquisition itself might suggest ELY management sees its growth in golf at least decelerating. And with the deal, ELY shares now rely almost as much on what essentially is an outdoor lifestyle roll-up as they do on the golf business:

source: Callaway presentation on Jack Wolfskin acquisition

That said, there is a clear path for the acquisition - if it works - to drive sustained growth in the consolidated business, and upside for ELY shares. For that to happen, the Callaway management team has to be right. If it is, ELY will be a multi-year winner again.

Red Flags in the Acquisition

There is no shortage of reasons to dislike the Wolfskin acquisition. From a broad

This article was written by

Vince Martin profile picture
Overlooked Alpha launched April 2022 - subscribe at overlookedalpha.com. Some OA articles are also available here at Seeking Alpha.I've been contributing to Seeking Alpha and other investment websites since 2011, with a general (though far from rigid) focus on value over growth. I got my Series 7 and 63 back in 1999, and watched the dot-com bubble peak and then burst in real time at a small, tech-focused retail brokerage in NYC.

Analyst’s 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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