Callaway Golf Company (ELY, $18.78) "With Bunkers Down the Fairway, Callaway Looks to Follow-Through"
By: Ellie O’Donoghue, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• Callaway
Golf Company (NYSE: ELY) is an American sporting goods company that
designs, manufactures, and sells golf clubs, golf balls, and other golf-related
accessories.
•ELY has three operating and reportable
segments: Golf Clubs (57.8% of FY18 revenues), Golf Balls and Gear (15.7%),
Accessories and Others (26.5%).
• Callaway Golf Company sells its
products throughout the United States and about 100 countries under the Callaway
Golf, Odyssey, Strata, OGIO, and TravisMathew brand
names
• Management has indicated a focus on
continuing to invest in R&D resources, especially AI, as well as tour and
customer-facing initiatives, such as fitting capabilities and B2B systems.
• Callaway is facing significant
financial headwinds in 2020 due to coronavirus, unfavorable foreign exchange
rates and tariffs.
Key
points:
Through their strong brand position and
continued investments, Callaway Golf Company’s valuable internal restructuring
and operational improvement has led it to maintain market leadership in the
stable worldwide golf market. In their recent 2019 earnings call on February
10th, Callaway’s management announced a strong overall fiscal year, with a few
missed figures in the fourth quarter due to some macro and industry headwinds.
As a whole, management stated that due to a fiscal year filled with strategic
and tactical reinvestments alongside overall positive market condition,
Callaway saw a 7.3% increase in revenues in the golf equipment segment and
overall revenue growth in every market.
With 2019 being a year of reaping the
benefits from expanding product launches and reinvesting in product technology
and development, Callaway continues to be able to claim the number one market
share position in clubs in both the US and Europe. Callaway has invested over $110MM in the past
three years to create and modify product designs using computer aided design
software, finite element analysis (“FEA”) software and structural optimization
techniques through Artificial Intelligence methods. New product innovation
combined with press coverage of using never before seen AI technology has
increased historically flat performance up 1% with estimates of new product
launches helping a net sales growth 56% in 2019.
In addition to these new and improved
product launches, Callaway has been aggressively reinvesting in their 700,000
square foot Callaway’s Chicopee ball plant capital project in Texas in order to
consolidate their DC’s in Japan, China and the UK. Although Callaway has seen a relatively
strong year of operational and financial performance, Callaway faces some
sizable headwinds due to coronavirus, unfavorable foreign exchange rates and
tariffs that will have a significant impact on their financial results. The
most notable factor is the coronavirus outbreak, which will affect Callaway’s
sales in Asia and their supply side overall. The coronavirus is already making
a clear impact, with Callaway forecasting a $25 million revenue decline two
days after their relatively positive 2019 earnings call. Management’s
statements on the sizable headwinds they are facing had a significant impact on
their stock price, with shares sliding 8.5% the day they announced their
expectations on the impact coronavirus will have on disrupting their
manufacturing. Although management is still positive on 2020 and their ability
and commitment to make successful long-term investments, Callaway’s fiscal year
success will be dependent on the viral outbreak and its effects.
What
has the stock done lately?
Although having a
strong past year performance, the rise and intensity of the coronavirus has
adversely affected the stock price. ELY has decreased 11.42% in the past
quarter and their decrease in price is not showing signs of slowing down due to
the continued prevalence of their dependence on China. Callaway’s price range
of $14.49-$22.33 shows the impact that the virus has had on the company, with
the biggest impacts being seen after the company announced their forecasted
revenue decline on February 12th, with Callaway Golf’s shares seeing an
immediate decrease of 8.5%. Although the coronavirus will certainly have an
impact on Callaway’s supply chain and near-term demand for their products in
China, management is still positive on 2020 being a year of “above-average
reinvestment” and hopes to see these investments be reflected in the stock
price once the coronavirus epidemic is, hopefully, resolved.
Past
Year Performance:
For their
full-year 2019, Callaway’s revenues increased 37% to $1.7 billion due to strong
performance in their golf equipment sales alongside gains in their soft-goods
sector including their brand TravisMathew and $356 million in Jack Wolfskin
sales. Callaway reported earnings of $79 million for the year, with a 36.87%
growth seen in sales. With the headwinds Callaway is expecting, management
still expects full-year sales of $1.75 to $1.78 billion due to their
reinvestment focus.
My
Takeaway
Although facing some macro factors that
will have an impact on their financial results, I believe ELY still has the
opportunity to make the put and thus should remain in the AIM small-cap
portfolio. Since being added to the portfolio at a price of $15, ELY has proved
itself to be a great swing due to their focus on transformation including
considerable amounts spent in R&D, new strategic acquisitions and
reinvestments in existing business to drive growth. Although facing bunkers
ahead, Callaway’s strong brand position and continued investments in current
and potential product portfolio has the ability to out-last the potential
short-term effects of coronavirus and other macro headwinds they are working on
mitigating in 2020. With an original target price of $25, playing the golf-game
slow and steady will eventually ring true by the end of the year, and Callaway
has the potential to recover and make a hole-in-one by the end of the year.
Source: FactSet
