Callaway Golf Company (ELY)

Fundamentally a strong company, good historical sales, good brand recognition. Management has taken action to ensure the company gets through the economic downturn and is positioned to do better in 2010.

Price/book of 0.71.

For the full pitch see my blog:
http://caps.fool.com/Blogs/ViewPost.aspx?bpid=283315&t=01004138070476150479

Callaway is loosing market share

black

friday

Callaway owns some of the best brands in the Golfbusines. Price is Cheap. It's a buy for me.

Cyclical. And it is the most desired golf clubs everywhere.

a good golf company

The pitch below is an example of the excellent work of Matt Argersinger (TMFMattyA), who composed this report for me as we looked into Callaway a bit more. Given what's below, I'm no longer much interested in the stock. But I'm putting it forward as my pitch for any interest here for CAPS & Fool Community.... --DG

Stock: Callaway Golf (ELY)
Recent Price: $6.80
Market Cap: $440 million

CAPS Rating: 4 stars

DESCRIPTION

Founded in 1982, Callaway Golf is in the business of designing, manufacturing, and selling of "high quality" golf equipment. Thanks to a buying binge in the late '90s and early 00's, it owns some of the most recognizable brands in the industry, including its namesake Callaway brand (clubs, including Big Bertha drivers, balls, apparel), Top-Flite (clubs, balls), Ben Hogan (equipment, apparel), and Odyssey (putters). In 2008 it purchased uPlay, a maker of GPS tracking devices and range finders. Callaway's products are sold to pro shops, sporting goods retailers, and third-party distributors in more than 100 countries. In 2008, the company generated $1.1 billion in revenue and earned profits of $66 million.

Percentage Probability ELY Beats the Market over the Next 3 Years? ~50%

There is strong evidence to suggest that golf is in the middle of a long-term secular decline. According to the National Golf Foundation, the number of golfers in the U.S. has declined from a peak of 30 million in 2000 to 26 million last year. More troubling is the decline in golf boosters (our version of net promoters), described as those golfers who play at least 25 times a year, which has dropped from 6.9 million to 4.6 million. But the number of golf courses has actually increased by 10% -- a challenging supply-demand dynamic that could plague golf-related companies for years to come. And the current dismal recession is likely to only reduce the number of active golfers further.

While Callaway owns some of the best-selling brands in the business, it hasn't been immune to the downturn. Sales have barely budged since 2000 (and that's including all of the company's various acquisitions). Returns on invested capital have badly lagged Callaway's cost of capital. Operating profit margins averaged in the mid-teens during the '90s, but have since fallen to the low single digits. And while the company was able to generate free cash flow most years and avoid taking on any debt, it was forced to issue $140 million worth of convertible preferred stock (7.25% dividend) earlier this year.

The only reason I think Callaway may beat the market over the next 3-5 years is because it's so cheap (never a good reason). Callaway's shares trades for about 80% of tangible book value. It has $50 million in net cash thanks to the preferred offering. And you can't argue with the company's brand portfolio. Callaway's carved out a large section of the premium golf equipment market. Any semblance of a return to growth for the golf industry could lead to huge gains for the company and its stock price.

WHAT'S TO LIKE

*A portfolio of the some of the most recognizable brands in golf: Callaway (Big Bertha), Top-Flite, Ben Hogan, Odyssey
*Consistent positive free cash flow and a healthy balance sheet -- no default risk here
*Up until recently, management had been buying up a good chunk of stock every year
*The stock price is dirt cheap; if golf makes a comeback, this is the company you want to own (along with a little Fortune Brands of course)

WHAT'S NOT TO LIKE

*Golf may be in a long-term secular decline
*Margins have dropped precipitously and have not recovered since the last decade
*Returns on invested capital have severely lagged the company's cost of capital since 2000
*Though revenue has slumped, inventories and accounts receivable have continued to ratchet up over the past year; Callaway could be facing some working capital problems -- and potential write-downs -- in the near future
*Recent issuance of preferred convertible shares came at a bad time; with a convertible price of just $7.05 per share, Callaway gave away a good chunk of the company at a far lower price than where the company was repurchasing shares over the last several years
*Company insiders own less than 2% of outstanding shares -- paltry for such a small company; how incented are they to turn this sinking ship around?

Good averaged FCF(free cash flow) over 6 years, low price to book and good current ratio. Known brand amongst golfers around the world.

Further to fall - they were apparently burning cash even through their peak Spring sales season.

a good golf company

Intrinsic value considerably higher, will be a strong performer when confidence returns at a broader scale. Brand amongst the very strongest in the sector providing a certain 'moat'.

Good Brand and Products.

Price isn't too dear.

looks good to me

Stock price hit rock bottom., ready to bounce back Strong brand (and I am NOT into golf at all) with low D/E.

bull

bull

Strong golf brand. Little to no long term debt and I just started playing their new driver, 3 wood, and ball. Great products.

there's not many stocks left with such low p/b ratios. fundamentals are pretty sound. i think what they're doing with the raising of capital is just being cautious, or maybe even trying to drive the price of the stock down so that they themselves can buy some.

i think all the bad news is priced in and cheap stocks are getting harder and harder to find this far into the rally. investors are looking for price book ratios below 1. if you notice, the big movers most often are stocks with good fundamentals near their 52 week lows that havent popped off yet. well, this probably wont pop off, given the bad taste many have in their mouths from the recent news. but its likely to rise.

check out the last two evaluations. i agree with them completely. brand name that has value. good buy for this cheap. excuse poor grammar and punctuations, im russian or something. and lazy

I spotted this stock as one of the biggest daily losers on the CAPS main page. I'm not a golfer, but I do watch it on television occasionally and recognized the Callaway brand name. I've heard positive things about their products and the world's second most famous golfer, Phil Mickelson, endorses them. Based on that, I decided to dig into this one a bit.

Net tangible assets (NTAs) for ELY equals $6.34 per share. Even in spite of the recession, they still had positive earnings in their most recent quarter, with diluted earnings per share of 11 cents. That's in spite of a sharp revenue drop from last year. FY 2008 earnings were around $1 per share and FY 2007 were around 80 cents per share. Not sure how their earnings will fare moving forward, but even if I discount their NTAs down to $6 and assume they average 30 cents per share with a minimal 3% growth rate every year, I still come up with a valuation around $10.20 per share. If I up earnings to 50 cents per share, that jumps to $13.00.

I admittedly don't know much about Callaway's business, but I like the upside here and the net tangible assets should provide some cushion on the downside. Callaway has no long-term debt and not too many liabilities, so they appear to be in sound financial shape, as well. Under $6, this looks like a relatively good value.