Acushnet Holdings: It’s Time To GOLF – Acushnet Holdings (NASDAQ:GOLF)

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Acushnet Holdings Corp. (GOLF) is an American golf equipment and apparel company with brands such as Titleist, FootJoy, Scotty Cameron, Knight, and Pinnacle within its portfolio. They are a subsidiary of Fila Korea, after being purchased for $1.23 billion in 2011 from Fortune Brands Inc. Acushnet Holdings is a leader in the golf industry, with 45% greater sales revenue than the next closest competitor, Callaway Golf (ELY).

Investment Thesis

There are three main reasons why Acushnet Holdings represents a worthwhile investment opportunity: strong organic growth, the opportunity for operational efficiencies, and the change in the competitive landscape.

Strong Organic Growth

Titleist and FootJoy represent two of the company’s category dominant brands, which have been achieved through product superiority and innovation, as well as strong brand names. Titleist remains one of the best golf balls in the game, with the Pro V1 being dubbed the “best premium overall golf ball.” With Q4 earnings being released in early March, Titleist golf balls saw 9.5% growth year over year. While the brand’s sale of golf clubs declined slightly year-over-year, this was due to the launch of the new iron and hybrid in September 2017 being offset by the higher priced drivers and fairways that were launched in 2016. This is based on the fact that Titleist releases drivers and fairways in alternating years to their release of irons and hybrids.

FootJoy’s golf shoes and gloves are considered to be some of the best in the sport, with 63% and 37% of players on the PGA tour in 2016 using FootJoy shoes and glove, respectively. Their nearest competitor had only 17% player penetration in shoes and 10% penetration in gloves on the PGA tour in the same period. The brand saw overall growth in FY2017, with their Q4 sales growing 14.6% year-over-year. Therefore, both Titleist and FootJoy should see continued organic growth in the industry as long as they are able to maintain their product superiority and strong brand names.

Operational Efficiencies

As an established company in the industry, Acushnet Holdings should be able to realize some operational efficiencies. In lowering fixed overhead and maintaining current tour expenses, the company should be able to improve their bottom line. General efficiencies on the company’s bottom line have begun to materialize with the company seeing SG&A fall at an annualized rate of roughly 1.4% in the last 3 years. The recent acquisition of Links and Kings, a maker of hand-crafted leather golf products, centered around the company being able to leverage Acushnet Holdings’ expertise to better manage back-room operations. Overall, in realizing these operational efficiencies, the company can improve margins moving forward.

Source: Acushnet Holdings

Competitive Landscape

The major catalyst for Acushnet Holdings is the change in the competitive landscape. While Acushnet Holdings has been able to maintain a dominant position in the industry, due to the industry’s stagnant growth over the past years, many large players have begun to exit. In 2017, Nike (NYSE:NKE) announced they would stop producing hard golf goods and Adidas (OTCQX:ADDYY) sold TaylorMade to KPS Capital Partners, a private equity firm. Both of these exits will create an opening in the industry, allowing for Acushnet’s portfolio of brands to gain further traction. Nevertheless, the company has not yet realized this shift, as the market remains flooded with older Nike and discounted TaylorMade products. Over the next two years, Acushnet Holdings should be able to gain market share with their strong brand names, as the competition begins to wither in a relatively stagnant industry.

Valuation

Looking at intrinsic and relative valuations, analysis suggests that the stock is currently trading at a discount of roughly 7% to 41%. A discounted cash flow, using both the multiples and growth method, puts the implied share price at roughly $26 and $34, respectively.

Source: Bloomberg

In examining Acushnet Holdings’ peers, the company is trading at par or below competitors in key multiples. Looking at multiples such as TTM EV/EBITDA and P/E, the implied price per share ranged from approximately $29 and $32.

Source: Capital IQ

Conclusion

In the long term, Acushnet Holdings must look outside of North America and continue to build brand awareness in the Asian markets. The company saw 11.3% growth in South Korea in FY2017 and 9.7% Q4 year-over-year growth in Japan. With TaylorMade having a strong foothold in China, brands such as Titleist must take advantage of the depressed sales that TaylorMade has experienced. While golf is considered a political taboo in China and seen as a “sport for millionaires,” the number of golfers in China has continued to trend upward since the opening of the first modern golf course almost 30 years ago. Investors must continue to track Acushnet Holdings’ operations in Asia, as it could significantly boost bottom-line profits for the company and increase overall valuation.

Nevertheless, within the next two years, Acushnet Holdings warrants a buy recommendation, due to the strong organic growth, the opportunity for operational efficiencies and the change in the competitive landscape, which is reflected in the implied valuation.

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. I have no business relationship with any company whose stock is mentioned in this article.

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