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Adams Golf, Inc. - A Wax Ink Raw Value Report

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May 23, 2009 – Comments (3) | RELATED TICKERS: ELY , NKE , FO.DL2

"At Adams Golf our most significant profitability measure is EBITDA..."

How it Got Here

Financial information contained in this report is based on the company's latest Form 10-K filing for fiscal year ending December 31, 2008, as filed with the SEC on March 11, 2009.

Executive compensation information contained in this report is based on the company's latest Form DEF 14A filing as filed with the SEC on April 15, 2009.

In addition, according to a Confidential Treatment Order certain information contained in the 10-K filing was approved for public exclusion until April 15, 2009.

The Company


Adams Golf, Inc. (Nasdaq: ADGF) incorporated in 1987, designs, assembles, markets and distributes golf clubs for all skill levels, including Speedline drivers and hybrid fairway woods, Idea Tech a4 and a4 OS I-woods and irons, Idea a3 and a3 OS I-woods and irons, Idea Pro Gold I-woods and irons and Insight Tech a4 and a4 OS drivers and hybrid-fairway woods, RPM family drivers and fairway woods and irons, the Ovation family of drivers, fairway woods and irons, and Tom Watson signature wedges. In addition, under Women's Golf Unlimited the company distributes the Lady Fairway and Square 2 brands.

Irons

In September 2008, the company launched the Idea Tech a4 and a4OS hybrid irons sets and hybrid irons and integrated sets. The a4 irons feature six forged cavity back irons integrated with two graphite-shafted hybrids. The Tech a4 OS irons are offered in three different eight piece configurations—one for men, one for women, and one for seniors. All sets have seven hybrid irons integrated into the set. The company also offers the Tech a4 OS Women’s 13 piece designer set with a bag by Keri Golf. During the year ended December 31, 2008, the Irons segment accounted for 62.5% of the company's net sales.

Drivers

The company offers different driver models based on the shape, size and material used in the club head. Adams Golf's driver heads are made of titanium, alloy and/or carbon fiber, depending on the model. The shafts of the company's drivers are generally graphite. During the first quarter of 2009, the company launched the Speedline driver line. In February 2008, it introduced its new Insight XTD series of drivers. In 2008, the Drivers segment accounted for 12.3% of the company's net sales.

Fairway Woods

During the first quarter of 2009, the Company launched the Speedline hybrid fairway woods line. The Speedline hybrid-fairway woods feature the playability of a hybrid and the distance of a fairway wood. The Speedline hybrid-fairway woods are offered in standard and draw variations with a variety of lofts and shaft flexes.

In February 2008 it introduced the Insight XTD hybrid-fairway woods. The Company offers a variety of individual hybrids in the recently introduced Idea Tech a4, a4 OS, Idea a3, a3 OS, and Idea Pro Gold lines. During 2008, the Fairway Woods segment accounted for 24.4% of the company's net sales.

Wedges and Other

As a complement to the Idea irons, the company offers the Tom Watson signature wedges with a classic profile and the Puglielli wedges. Adams Golf also offers a line of putters, golf bags, hats and other accessories. In 2008, the Wedges and Other segment accounted for 0.8% of the company's net sales.

Competition

The company competes with Callaway Golf Company, Inc. (NYSE: ELY) Adidas-Salomon AG, Nike, Inc. (NYSE: NKE), Fortune Brands, Inc. (NYSE: FO), and Karsten Assembly Company (PING).

Backing Up

On February 4, 2008, the company's stockholders approved a 1-4 reverse stock split effective February 15, 2008. In addition, the stockholders approved moving the company's stock listing from the OTC Bulletin Board to the NASDAQ.

Related Party Transactions

According to company SEC filings, the company does not have a specific set of policies and procedures with respect to the approval of related party transactions, relying instead on their Code of Conduct, found in their Employee Information Guide, which governs the company's decision-making with respect to related party transactions.

The company stated that in general, related party transactions were infrequent in nature and are always disclosed to the Board,and that if a related party transaction affects a specific Board member, that Board member will be recused from voting with respect to the approval of the related party transaction. In fiscal 2008, there were no related party transactions that were reviewed for approval.

It was disclosed that Ms. Cindy Adams-Herington, the daughter of Chairman Barney Adams, owns 40% of Plano Paper and Supply and her husband, Mr. Tom Herington owns 60% of Plano Paper and Supply, and that Chairman Barney Adams, is a lender to Plano Paper and Supply.

Additionally, in June 2005, Adams Golf, in an open bid process, selected Plano Paper and Supply as a supplier of shipping boxes for their products, and during fiscal 2008, made total purchases of $359,751 from Plano Paper and Supply. This supply arrangement is subject to change at any time based on then current market conditions and an ongoing competitive bidding process.

The dollars spent with Plano Paper and Supply during fiscal 2008, was 359.75% of EBITDA.

Relationships

Two adult children of Chairman Barney Adams are employees of Adams Golf. Mr. Edwin Adams serves as General Counsel, and for fiscal 2008 received an annual base salary of $134,000 and a performance bonus of $14,500 related to second half 2007 fiscal year performance.

In addition, Ms. Cindy Adams-Herington holds the position of Vice President, Advertising and Marketing and received an annual base salary in fiscal 2008 of $168,826 and a performance bonus of $40,977 related to second half 2007 fiscal year performance.

Neither Edwin Adams nor Cindy Herington has employment contracts or change of control arrangements with the company.

The dollars spent for Mr. Adams' children during fiscal 2008 was 302.83% of EBITDA.

Executive and Director Compensation

There really isn't much reason to delve into the Directors and Named Executive Officers specific compensation and/or stock options, since there is no effective way to change it. However, what can be highlighted are the dollars spent to compensate Senior Executives and Directors over and above their standard compensation. Additional compensation that appears to have kept the company on the path to mediocrity.

Included in the 2008 compensation package for Mr. Brewer, the CEO was $24,586 for automobile expenses; $1,436 for Group Term Life insurance premiums; $21,833 for health and welfare benefits; $2,430 of non-reimbursed business expenses; $18,446 for country club memberships and $9,200 of 401k matching contributions. The dollars spent for Mr. Brewer's "additional" compensation for fiscal 2008 was 77.93% of EBITDA.

Included in the 2008 compensation package for Mr. Eric Logan, Senior VP and CFO was $455 for Group Term Life insurance premiums; $24,013 for health and welfare benefits; and $10,379 of 401k matching contributions. The dollars spent for Mr. Logan's "additional" compensation for fiscal 2008 was 34.85% of EBITDA.

Included in the 2008 compensation for Mr. Adams, Chairman of the Board of Directors, was $21,630 in automobile expenses, $6,995 in group term life insurance premiums, $18,167 for health and welfare benefits, $426 of non-reimbursed business expenses and $7,356 of 401k company matching contributions. The dollars spent for Mr. Adams' additional compensation for fiscal 2008 was 54.57% of EBITDA.

It is noted that for fiscal 2009, the company's non-employee directors, agreed to a reduction in their annual cash retainer, reducing it from $40,000 to $20,000.

In addition, CEO Brewer agreed to a fiscal 2009 salary reduction from $425,000 to $360,000, and CFO Logan agreed to a 2009 salary reduction from $215,000 to $200,000. There was no notice that Mr. Adams would reduce his $254,000 2008 salary for fiscal 2009.

Reasonable Value

Adams Golf is on the Wax Ink Watch List with a Reasonable Value Estimate of $3.99, a Buy Target of $2.00, a First Sell Target of $3.89, and a Close Target of $4.21. Based on a review of the previously referenced company SEC filings, the Buy Target has been reduced from $2.00, to $0.77.

Investment Thoughts

Management prattles on about the company's most "significant profitability measure" being EBITDA. Yet for fiscal 2008 EBITDA was 0.11% of Sales, a decrease from fiscal 2007 of just over 5.5%. So instead of reigning in a portion of Executive/Director compensation, which would have added almost $168,000 to the company's EBITDA, management kept their collective hands in the till and got what they and the company had agreed upon.

Certainly, these things were agreed to well in advance, and there was nothing noted in the company filings that mentioned employee or employee benefit reductions. Yet for a company with a market cap of $20 million, whose main asset is $6 million in cash, $5.3 million less than at the end of fiscal 2007, it just seems that management would be doing all it could to hold on to the company's most important asset. Especially in light of the current economy difficulties the world is experiencing.

Additionally, considering that the game of golf is not exactly an inexpensive game, with a set of golf clubs selling for more than $1500, not to mention golf shoes, a bag for the clubs, green fees and cart rentals, it just seems reasonable the management would be considering the future.

But, nowhere did management provide any discussion about how the consumer, strapped for cash and carrying far too much debt, was going to afford the products the company makes. It is almost as if management's plan is to simply stick its head in the sand and hope for the best.

While this is troubling, it really isn't surprising considering the management seemingly had no idea where the overall economy was going, nor apparently, did management have any plan in place, should the overall economic enter a slowing period.

We believe that an investment in Adams Golf, Inc. would be extremely ill advised, with the probability of investment loss high, and the probability that management would have a clue, even higher.

Indeed Tom Watson plays with them, and so do Aaron Baddeley, Brittany Lang, and Brittany Lincicome. Which is quite a contrast considering the only thing management seems able to play with is themselves.

Wax


Adams Golf Worksheet 1208

3 Comments – Post Your Own

#1) On May 24, 2009 at 9:19 AM, wilkinvest (< 20) wrote:

...And in my investment portfolio, my most significant profitability measure is Margin of Safety.  I do admire your facts and opinions, Wax.  I agree with some of the pokes at management and agree they should provide some honest information in regards to cash, cost saving measures, and expected consumer actions in their industry.  I do take some confidence in the Board consisting of individuals that have quite a stake in the company, and I'd hope would make decisions in the best judgement of the company owners (i.e. shareholders).

I would like to bring some optimism to the table.  Without breaking down numbers, the company as a whole is selling for a quite a discount with its current market share price (just analyze its balance sheet).  I'd give it a reasonable value greater than yours, but then again the market tells us we are both "wrong."  Contribute it to the overall economy, demand for stocks, its minimal time on the NASDAQ causing some unawareness, its low trading volume, a combination, or whatever else, one who believes in the American economy and its market system cannot say the price offered today is a 'bad' investment.  In fact, one could find quite the difference between what they're paying for and what they get. 

-HW

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#2) On May 24, 2009 at 10:25 PM, wax (97.02) wrote:

Hi HW;

Thank for your thoughts on Adams Golf. I actually didn't think there was much interest in this company.

At any rate...

Included at the end of my post, was indeed a breakdown of the numbers. Just click on the Adams Golf Worksheet 1208 link and my worksheet for the company should open, or you should be able to download the PDF file.

Certainly I poke a bit of fun at managment from time to time, but only in an effort to overcome the tedium that can be investment research.

But regardless, it is my opinion that management is 100% responsible for everything that happens in a company, and that a company's financial statements always reflect management's performance.

While important to many investors, the fact that management does or does not have a large stock holding in the company means little to me, since that vast majority of that stock came as part of an employment contract, having had little to nothing whatsoever to do with management's belief in the company.

As to selling at a discount, I think my question is, at a discount relative to what? I'm thinking that the stock is probably pretty close to being fairly valued at current levels.

As to being a "bad" investment, I do not think that is the case. I just think in that particular sector, there may be better investment choices.

Hw, please bear in mind that I have no investment interest in this company at the present time, nor do I think an investment in this company at the present time will yield any measurable returns.

Hope I have addressed your thoughts. If not, feel free...

Wax

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#3) On June 29, 2009 at 12:52 AM, Klarmanfan (< 20) wrote:

I think HW's reference is to ADGF's NCAV pershare of $5.30 per share. Graham & Dodd popularized the investment process of buying companies for fractions of their NCAV. Studies have verified the merits of this investment approach. Studies have resulted in long-term returns in excess of twice the S&P 500 returns.

 

While I do agree that management is rather highly compensated for such a small company, I disagree with your evaluation that there is significant downside risk to ADGF's share price from current prices. The company's liquidation value per share is approximately $2.8 a share according to my estimates, meaning there is very little risk of a permanent loss of capital at current prices.

 

Speaking of competitors, ELY also appears to be very attractively priced. While it is not nearly as cheap as ADGF, it obviously has a much stronger market position and probably deserves to trade at a premium to ADGF. ELY also has a better history of generating cash from operations. Corporate governance also appears to be somewhat better at ELY. Happily, golf club companies appear to attract some highly talented and experienced board members (both ADGF and ELY have some seriously accomplished board members). 

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