Acushnet Holdings: Limited Upside Due To Minimal Growth Drivers

May 19, 2022 4:44 PM ETAcushnet Holdings Corp. (GOLF)ELY4 Comments1 Like
J.B. Meathe profile picture
J.B. Meathe
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Summary

  • Acushnet Holdings' Titleist brands are among the most valuable in the golf equipment industry.
  • Significant increases in beginner golfers and total rounds played over the past two years bode well for GOLF and other golf equipment providers.
  • GOLF has greater exposure to consumables such as golf balls and golf gloves, giving the company some financial stability in a seasonal industry for many of their geographical markets.
  • Golf equipment market is slowly expanding at a CAGR rate of 2.2% through 2025, which limits top-line growth for GOLF in the future.
  • GOLF is fairly-valued according to relative metrics and slightly undervalued under absolute metrics assuming analyst estimates for free cash flow in FY22 and FY23.

Titleist Golf Ball

D. Lentz/iStock Unreleased via Getty Images

Investment Thesis

I rate Acushnet Holdings (NYSE:GOLF) a hold due to their position in a healthy golf industry, revenue structure with relative stability, fair valuation based on relative metrics, and slight undervaluation based on absolute metrics. GOLF is the holding company of the premier golf brand, Titleist. The game of golf continues to grow among America's youth, which bodes well for GOLF in the future.

From 2012 to 2020, GOLF experienced little to no growth in total revenue. In 2021, the company experienced record top-line growth of 33%. While this financial metric is impressive, I do not believe this kind of growth is sustainable, given that GOLF is sequestered solely in the golf equipment market. If they want to deliver significant returns for shareholders in the future, GOLF must invest in other valuable brands or form strategic partnerships with synergistic benefits to provide above-WACC returns for investors.

Current State of Golf

The popularity of golf continues to grow at a steady rate and is currently being played by more than 60 million people in more than 130 countries. Some see the addition of golf to the Olympic Games as the impetus behind the recent spike in growth. Additionally, the recent development of the Saudi Golf league shows the growing popularity of the sport around the world. This new league is attracting some the world's best professional golfers, which will further expand the games footprint and grow it's popularity on a global scale. In 2019, 441 million rounds of golf were played in the United States. Throughout 2021, 527 million rounds were played, representing a 19% increase from 2019 and 4.5% increase from 2020 (see below).

total golf rounds played by Americans in the last three years

Total Round of Golf in U.S. - 2019 to 2021 (Author)

Compared to total rounds played year to date in March 2021, there has been a slight decrease rounds played as of March 2022 YTD. Compared to the total rounds played at March 2021 YTD, rounds played in March 2022 YTD are down 7.5% (see below). However, overcoming last year's YTD growth of 24% is a tall order. Relative to historical records, total rounds played year to date remain significantly elevated for March 2022.

total rounds of golf from January to March in 2022

Total Rounds of Golf in March 2022 YTD (Golf Datatech)

In the chart below, you can see the annual total of beginning golfers for the past 36 years. It is interesting to see the noticeable uptick from 1997 to 2000, attributed to the rise of Tiger Woods. Also worth noting, there was a slight decrease during the aftermath of the Great Recession. In recent years, the number of beginner golfers has substantially increased, leading to healthy demand for golf equipment. During the onset of the coronavirus pandemic in 2020, the United States saw a boom in new golfers, breaking records with a total of 3.1 million new golfers. Unfortunately, due to the Covid-19 pandemic, GOLF experienced a lag in their top-line in FY20, mainly due to the majority of their sales being generated in retail sporting goods stores. However, this growing trend in new golfers continued into 2021, which caused GOLF to experience record top-line growth.

total number of beginner golfers from 1986

Annual Total of Beginner Golfers (National Golf Foundation)

In 2021, the number of beginning golfers broke the 2020 record with 3.2 million new golfers. The rise in the popularity of golf in recent years has been driven by increased disposable income among the middle class, as well as an increase in the popularity of golf among the female population. In 2021, 35% of junior golfers were female, compared to 15% in 2000. Growing popularity of golf among female youth bodes well for GOLF's Titleist brands in the future, exposing them to a whole new market for top-line growth.

Best in Class Golf Brands

GOLF's Titleist, FootJoy, Scotty Cameron, and Vokey Wedge brands are some of the most coveted among both professional and recreational golfers. Titleist's golf ball is used by almost 70% of the top 100 players on the PGA tour (see below) and holds the largest market share among leisurely golfers. At FYE 2021, GOLF's Titleist golf balls held over 50% market share of the $1.22 billion golf ball market. In comparison, Callaway Golf (ELY) announced during 1Q22 earnings that they continue to place 2nd to Titleist in terms golf ball market share, estimating that ELY currently holds just over 20% of total market share.

golf ball breakdown of top 100 players in world'

Golf Ball by Brand- Top 100 PGA Players (Golfing Focus)

GOLF's golf shoe brand, Footjoy, is also highly coveted among professional and recreational golfers. Twenty percent of the top-50 professional golfers in the world wear FootJoy, making them the leader in golf shoes worn among these professionals. FootJoy has been the number one shoe on the PGA tour since 1945. At FYE21, FootJoy held over 34% market share of the total golf shoe market among both professional and recreational golfers.

The putter segment of Titleist, Scotty Cameron, is a brand of high-end putters that sell for an average of $400 per unit, depending on the particular model. In 2022 alone, Scotty Cameron putters have had 43 professional victories across the globe. Additionally, Scotty Cameron offers putter remodeling services, allowing golfers to refurbish and customize their putters for a premium. Scotty Cameron's refurbishing and customization services give GOLF a competitive advantage for their Scotty Cameron putter brand. Other golf equipment companies do not possess these services, which distinguishes GOLF's Scotty Cameron segment from that of their competitors.

Revenue and Financials

Since 2014, GOLF's revenue structure has remained relatively stable with most of their revenue continuously being attributed to golf balls. While balls have always been their main source of revenue, their second main driver behind their top-line has been interchangeable between golf clubs and golf footwear. In terms of numbers, revenue attributed to both shoes and clubs has remained relatively stable in the last 8 years.

GOLF's top-line revenue is relatively more stable than competitors because 31% of their revenue in FY21 was attributed to recurring consumables such as balls (see below). For leisurely golfers that lose golf balls on a regular basis, they are a necessity. A study has shown that the avid golfer loses an average of 1.3 balls per round, while the occasional and beginner golfer would lose significantly more. Additionally, at a professional level, PGA tour players regularly change golf balls every 6 or 7 holes to optimize performance.

breaks down the amount of revenue generated by each segment

GOLF's Revenue by Segment (Statista)

Their second biggest driver of revenue, FootJoy golf wear, made up 27% of their total revenue in 2021. While not a regularly recurring consumable, golf shoes have a relatively short useful life of 2 to 5 years before necessary replacement. Additionally, their FootJoy segment includes the sale of golf gloves, which like golf balls, is a recurring consumable among golfers. And finally, GOLF's sale of golf clubs and golf gear made up 26% and 9% of total revenue, respectively.

From 2012 to 2020, Acushnet has experienced minimal top-line growth. However, in 2021, GOLF recorded record sales of $2.15 billion, representing 31% y/y growth. While impressive, GOLF cannot continue to rely solely on golf equipment as a source of growth to deliver healthy returns for shareholders. Callaway Golf acquired Top Golf in 2020 for over $2.5 billion as a future growth initiative, allowing ELY to no longer be solely reliant on revenue from the golf equipment market. The Top Golf acquisition expanded the company's footprint into family entertainment, creating an additional revenue stream. This acquisition caused ELY to record total revenue of $3.13 billion in FY21, representing top-line growth of 94% in 2022 (see below). I recently wrote an article on ELY and the opportunity that Top Golf presents, which can be viewed here. On the other hand, GOLF continues to be sequestered solely in golf equipment, which is insufficient to drive significant top-line growth to make an investment in the company attractive.

revenue historical for both Calloway and Acushnet

Historical Revenues for GOLF and ELY (MacroTrends)

Unfortunately for GOLF and other golf equipment companies, the margins in the golf equipment industry are razor thin, limiting their profitability to reinvest in the further growth of their business. The width of these margins for golf equipment companies is largely dependent on when their products are purchased. Their margins become slimmer as the prices of their older equipment get marked down by retailers. Historically, net profit margins for GOLF were generally around 6.5%-7%. In FY21, GOLF's net profit margins were 8.3%, up from 5.3% in FY20 (see below). Due to GOLF's expanded margins and record revenue growth, GOLF almost doubled the amount of liquidity on its balance sheet in FY21.

Net profit margins for Acushnet over last 5 years

GOLF's Net Profit Margins (MacroTrends)

Golf Equipment Industry

The global golf equipment market size was valued at $6.94 billion in 2021 and is expected to expand at a CAGR of 2.2% to $7.5 billion in 2025. As of YE21, GOLF held almost 31% of total market share in the golf equipment industry. In 2021, rising disposable income and healthy consumer balance sheets among the U.S. population aided in the markets continued valuation growth.

golf equipment market breakdown by product and size

Golf Equipment Market Size by Product (Grandview Research)

Most of the golf equipment market's revenue is generated by golf clubs, followed by golf balls, which is followed closely by footwear. In 2018, golf clubs made up 45% of the total revenues in the golf equipment market, representing $3.13 billion. As of FYE21, the golf club market had a total value of $3.34 billion and GOLF's golf clubs make up over $550 million of that total valuation. GOLF's golf club revenues in FY21 made up 16.51% of the total revenues generated from golf club sales throughout 2021 (see below). Because of the significant amount of revenue being generated by golf club sales in the total market, GOLF has the opportunity to grow its golf club segment into a more dominant player among competitors.

total market share for each product category of GOLF

GOLF's Market Share By Product (Author)

As of YE21, the golf gear industry is worth a total of $690 million. In FY21, GOLF's golf gear segment generated 27.9% of the industry's total revenue attributed to golf gear sales. GOLF's golf gear revenue of $192 million makes up 27.9% of the total market revenue attributed to golf gear sales. The golf gear segment is expected to grow at a CAGR of 3.5% through 2025, which is set to benefit GOLF given their healthy market share in the golf gear segment.

Because of GOLF's reliance on golf balls for revenue, it would be helpful for investors to forecast the golf ball market in particular. In 2021, the global golf ball market size was valued at $1.22 billion. GOLF's golf ball revenue at FYE21 of $667 million represented over 54% of total market share for golf balls at YE21. The golf ball market is projected to grow to $1.41 billion in 2025, representing a CAGR of 2.7% (see below).

breakdowns and forecasts golf ball market size by product type

Golf Ball Market Size by Ball Type (Grandview Research)

GOLF currently produces every type of ball, offering 2-piece, 3-piece, and 4-piece golf balls, which gives them broad exposure to every segment of the golf ball market. GOLF's large portion of market share in the golf ball market will give them an advantage against competitors due to the forecasted CAGR of the ball market being notably higher than the forecasted CAGR of the broader golf equipment market.

Relative Valuation

Relative to industry multiple averages, GOLF is trading at both a premium and discount. Relative to the industry's mean, GOLF's P/E ratio of 14.4x is trading at a 16% premium. GOLF's EV/EBITDA ratio of 9.5x is trading at a 1% discount. GOLF's EV/EBIT multiple of 11.6x is a 8% discount. Their EV/Rev multiple of 1.5x is trading at a 9% discount. And finally, their Price/Book multiple of 2.9x is trading at a 25% premium.

Multiples used in relative valuation for GOLF

GOLF's Relative Multiples (Bloomberg)

Relative to their direct competitor, Callaway Golf Company, GOLF is trading at both a discount and premium as well. GOLF's P/E ratio of 14.4x indicates undervaluation relative ELY's multiple of 23.9x. Their EV/EBITDA multiple of 9.5x indicates undervaluation relative to ELY's multiple of 11.1x. Their EV/Revenue multiple of 1.5x indicates fair valuation relative to ELY's EV/Revenue of 1.5x. And finally, relative to ELY's P/Book multiple of 1x, GOLF is overvalued with a multiple of 2.9x.

Discounted Cash Flow Analysis

For my discounted cash flow model, I used analyst estimates of $180.30 million and $220.70 million for free cash flow in FY22 and FY23, respectively. I made assumptions of a 4% CAGR for FCF in FY24 and FY25. After placing these assumptions into my DCF model, I arrived at the following cash flows for FY22 through FY25:

forecasted free cash flows using my assumptions

GOLF's Forecasted Free Cash Flows (Author)

For my discount rate, I calculated GOLF's WACC to be 8.04% using their current market capitalization and market value of debt (see below). After using the CAPM formula to calculate GOLF's cost of equity, I arrived at market risk premium of 7.03% by taking the difference between an expected market return of 10% and the US Treasury 10Y yield of 2.97%. To calculate the market value of debt, I used GOLF's interest expense and book value of their total debt at YE21. I added a risk premium of .50% to my calculated WACC of 8.04%, arriving at a discount rate of 8.54%.

Calculation of discount rate used to discount forecasted cash flows

Calculation of GOLF's Discount Rate (Author)

After applying a discount rate of 8.54% to my forecasted future cash flows for GOLF, I arrived at an intrinsic value of $52.02 per share (pictured below). This represents 26.87% upside from the current share price. My price target falls above the median price target ($47.50) of Wall Street research analysts. Twelve-month price targets of analysts range from $44 (7.1% upside) to $61 (48.5% upside). Additionally, the median price target of $47.50 represents 15.7% upside.

intrinsic value calculation for GOLF stock

GOLF's Intrinsic Value (Author)

Investment Risks

There are a number of risk to consider before investing in GOLF. As the global economy continues to slow and the risk of recession continues to increase, golf equipment companies such as GOLF could be particularly exposed to an economic downturn, mainly due to the view of golf equipment as a discretionary expense. In the case of a recession, discretionary expenses among consumers will decrease to cope with economic pressures. Significant decreases in discretionary spending would place a drag on GOLF's top-line.

Additionally, there is always the risk of decreased popularity in the game of golf. Over the past two years, the game of golf has experienced a notable increase in beginner golfers. It remains to be seen how much of this was attributed to Covid-19, which drove many consumers to begin playing the sport. The recent Covid-19 tailwind for the game of golf could be temporary and does not necessarily indicate future growth in the sport's popularity.

A third and final risk for GOLF is the high amount of competition in the golf equipment industry. Callaway Golf continues to acquire further market share in the golf ball market, which could pose a risk for GOLF's top-line. In FY21, GOLF was reliant on golf balls for 31% of their total revenue. If they continue to lose market share in this product category, they could run the risk of falling behind industry competitors such as ELY.

Closing Remarks

While GOLF does possess a strong position as a valuable golf brand in the golf equipment market, the company does not possess any future growth drivers that make it an attractive investment. While their revenue structure is more stable relative to competitors, the golf equipment market is not growing rapidly enough to deliver any meaningful returns to shareholders. If you currently own GOLF, I would hold because I think there is still upside for the stock due to the recent uptick in the popularity of golf. However, I don't believe that GOLF warrants the idea of an attractive long-term investment. Hold GOLF.

This article was written by

J.B. Meathe profile picture
196 Followers
MBA- John Carroll University. Fundamentals-based Investor with financial modeling experience. Strive to identify companies with valuable operating assets, healthy free cash flow/margins, and that operate within expanding markets.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

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