If a stock run could be likened to a hot birdie streak, Callaway Golf’s (ELY) near-63% increase in 2018 is certainly that.
Golf icon Tiger Woods, innovative versions of its famous Big Bertha driver and new incarnations of its golf balls have combined to help the company emerge as a market leader.
It all culminated when Callaway recently overtook Titleist parent Acushnet Holdings (GOLF) in market cap heading into 2018’s proverbial back nine.
The company boasts a roster of sponsored pros headed by Phil Mickelson. But it is the comeback of Mickelson’s greatest rival, Woods, that is pulling in fans. That’s helping fuel the stock’s performance.
“Tiger’s comeback is a huge deal because its causing a massive spike in TV ratings,” Jefferies managing director Randal Konik said. “His presence helps people watch a lot more golf on TV, which gets people interested in the sport again. It also gets those fringe golfers to potentially buy products that they see on TV.”
New Golden Age For Golf
In addition to Tiger Woods, there is also a crop of interesting young players. They’re helping the professional game enjoy something of a golden age. This popularity boom is one of the reasons Callaway is outperforming expectations. It recently scored a double beat on revenue and earnings in its most recent quarterly report. That included an 85% earnings increase.
“Golf right now is very strong with its core consumers. I think with all the great young players out there like Rickie Fowler, Jordan Speith, Rory McIlroy and others, there’s a lot of interest,” Cowen managing director John Kernan said. “Add that on to the popularity of Phil Mickelson and Tiger Woods, the game has a lot of great ambassadors and players right now.”
And this popularity is reflected in the amount of cold hard cash being spent at retailers, according to B. Riley FBR managing director Susan Anderson.
“A lot of the sporting goods retailers such as Dick’s (DKS) have called out golf as a bright spot,” Anderson said. “In general the inventory has rationalized, it’s been cleaned up quite a bit, the promotions have come down and everything is much healthier out there.”
Callaway Golf Innovates
But rising interest simply creates an opportunity. CAN SLIM connoisseurs know good companies must innovate to take advantage, which is why the N stands for new products. Here, Callaway Golf is again shooting under par, according to Cowen’s Kernan.
“I think the brand has established itself as the premier equipment brand in golf at this point, especially as it relates to woods, drivers and hybrids,” the analyst said. “(With) the new ‘Jailbreak Technology’ they’ve introduced, its been a pretty incredible product cycle they’ve been on.”
Callaway contends their Jailbreak driver technology allows players to hit balls farther, and is more forgiving of imperfect strokes. A pair of titanium rods connect the top and bottom of the driver head. That reduces club head warp on impact and allows more power transfer.
Callaway’s Great Big Bertha Epic introduced the technology last year. It has been cited as one of the reasons for the firm’s 17% increase in net sales in 2017.
So far in 2018 revenue is up 30% while earnings per share have doubled. Its excellent performance is reflected in its IBD Composite Rating of 98, which puts it in the top 2% of stocks. In addition, its Relative Strength Ratinga measure of price performance, is also stellar at 94.
Tops In Club Sales
In terms of dollars spent, Callaway is number one in the U.S. for woods, drivers and irons. They also have established themselves in second place for putters and golf balls. In the latter case their new “Chrome Soft” line, which was refreshed in February, has proved popular.
Callaway also impresses Jefferies’ Konic with the way it gets golf balls in the hands of consumers and snatches away share from dominant player Titleist.
“Their ball has done well as evidenced by the sales velocity of the business. Where they’ve done a great job is the marketing of the product — the name Chrome Soft,” Konic said. “Chrome is hard, its shiny, its bright. Soft means its soft core, which means it’s supple, (and) is going to give you spin”
Callaway Chief Executive Chip Brewer was particularly proud of his company’s latest offerings at the firm’s most recent earnings call.
“Our new products, particularly the Rogue line of woods and irons, as well as our new Chrome Soft golf balls featuring Graphene are resonating on a global basis,” he said.
And he has a point — sales have been soaring in all regions. In the most recent quarter they were up 35.2% in the U.S. Sales also jumped 11.4% in Europe, 36.6% in Japan and 35.9% in the rest of Asia.
Brewer wants to keep he momentum going. He has said the firm will continue to invest in research and development, golf ball operations, tour, sales and marketing.
The New Big Four Of Golf
Ask any fan of the sport about golf’s Big Four. The names that immediately spring to mind are Jack Nicklaus, Arnold Palmer, Gary Player, and Lee Trevino.
But Callaway Golf is part of a new big four that have emerged to take advantage of sports behemoth Nike’s (NKE) exit from the equipment space in 2016.
“Instead of 20 equipment companies, we have basically four that matter — TaylorMade, Ping, Acushnet and Callaway,” Konic said
Cowen’s Kernan also believes the consolidation is proving to be a good thing, as it is leading to “more rational pricing and inventory management.”
Meanwhile the company has been branching out of its traditional sphere with smart acquisitions and investments which have boosted earnings. Last year they acquired bags and backpack maker OGIO and apparel manufacturer TravisMathew, a popular brand among PGA pros, for a combined $201 million.
And B. Riley FBR’s Andersen cited the firm’s investment in sports entertainment company Topgolf as a shrewd move that continues to add value to Callaway.
The company currently has 41 venues serving more than 13 million guests every year. While its core business in the U.S. it also has locations in the U.K., Australia, Mexico, Canada and the United Arab Emirates.
Cowen’s Kernan believes the value of the stake could balloon due to the popularity of the franchise. Topgolf combines a bar and dining experience with interactive golfing games.
“I think it will probably be an IPO at some point in the near future and will certainly earn a multibillion valuation based on the growth potential we see for the company,” the analyst said.
Going forward, Jefferies’ Konic believes the firm must continue to lead the pack on the marketing front. He says it gives the brand a special edge among a sometimes maligned group of golfers — the Sunday morning shankers.
“(Callaway’s) opportunity is among the non-avid and the avid golfer that’s not great,” he said. “They are the types who won’t take the time to work out why the PING is different from the Titleist or Callaway driver. They may be more swayed by some marketing message, like the name of the driver sounds cool, try it first, like it and buy it.”
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