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Bull of the Day: Callaway Golf Company (ELY)

Benjamin Rains

Shares of Callaway Golf Company (ELY) have climbed over 35% in 2019 and they might still have room to run heading into the company’s upcoming third quarter 2019 earnings release.

The Pitch

Callaway runs a relatively straight forward business. The Carlsbad, California-based company manufactures and sells high-end golf equipment and apparel from clubs and balls to shirts and hats. The firm went public back in 1992 and today boasts a portfolio of five brands, including its namesake, Odyssey, and upstart power TravisMathew.

The firm sponsors professional golfers from the PGA, LPGA, and other top tours around the world. Phil Mickelson, Sergio Garcia, Michelle Wie, and other giants of the game of golf are all part of Callaway’s team. Callaway also announced on October 21 a new multi-year partnership with NBA star Stephen Curry to help expand golf to reach “underserved and underrepresented youth.” Curry remains an Under Armour (UAA) athlete on the court, but his passion for golf seems poised to help Callaway.

Callaway competes alongside Titleist owner Acushnet Holdings (GOLF) and other well-known brands. It is worth remembering that sportswear giants Nike (NKE) and Adidas (ADDYY) have both moved on from the golf equipment business in recent years.

On top of that, Callaway purchased Jack Wolfskin for roughly $476 million in early January 2019. The German-headquartered outdoor apparel brand competes against the likes of Columbia Sportswear (COLM), The North Face (VFC), and others.

Jack Wolfskin helps Callaway diversify beyond golf, which is a good sign as the sport has dealt with popularity issues. Looking ahead, Callaway executives plan to make more “strategic investments in complementary areas.” The firm has also tried to expand further into digital video and audio entertainment to help gain exposure and build brand awareness in a world dominated by YouTube (GOOGL), Instagram (FB), Twitter (TWTR), and other modern mediums.

 

 

 

 

Price Movement

Moving on, investors can see that shares of ELY have easily outpaced rival Acushnet Holdings over the last three years, up 103% against GOLF’s 59%. Callaway stock has lagged behind its peer group, which includes Yeti (YETI), Vista Outdoor (VSTO), and other higher-end recreation-focused companies, in 2019 and over the last 12 months.

Still, ELY stock is up over 35% so far this year to blow by the S&P 500’s 19% movement and Nike’s 23%. Plus, Callaway stock closed regular trading Thursday at $20.90 per share, which marks a roughly 13% discount against its five-year highs of over $24 per share that it reached in September of 2018.

This could give Callaway shares room to run if the firm is able to impress Wall Street when it reports its Q3 fiscal 2019 financial results on Wednesday, October 30.

Other Fundamentals

Despite its solid climb over the last three years, ELY stock is trading below its median during this strength in terms of forward earnings. Callaway currently rests at 17.9X forward 12-month Zacks Consensus Earnings Estimates, while its three-year median comes in at 22.8X, with a 42.5X high.

Callaway is trading below its one-year high of 20.2X and its industry’s 22.6X. Along with trading at a discount compared to its market and its own recent history, ELY’s forward price/sales ratio of 1.1 comes in below its industry’s 2.9 and its own three-year median of 1.2.

The company also pays a small dividend and announced a new share repurchase plan last quarter of up to $100 million. And ELY is part of our Leisure and Recreation Products industry that rests in the top 30% of our 255 Zacks industries.  

 

 

 

 

Q3 Outlook & Beyond

Our current Zacks Consensus Estimates call for the company’s quarterly revenue to climb 60.2% to reach $420.79 million. The firm’s fourth quarter sales are then projected to surge 73.10%, with its full-year fiscal 2019 revenue expected to jump 36.5% to $1.70 billion. It is worth remembering that these figures are boosted somewhat by its Jack Wolfskin purchase.

With this in mind, Callaway’s 2020 sales are projected to climb 5% above our current year-projection to come in at $1.78 billion. This would come on top of 2018’s 18.5% full-year revenue expansion and 2017’s 20.4% growth.

At the bottom-end of the income statement, ELY’s adjusted Q3 earnings are projected to soar 130% from $0.10 per share in the year-ago period to reach $0.23. Overall, the golf power’s FY19 EPS figure is projected to climb 0.93% to hit $1.08 per share, with 2020 expected to come in 13% higher at $1.22.

Bottom Line

Callaway is a Zacks Rank #1 (Strong Buy) at the moment that also sports a “B” grade for Value and an “A” for Momentum in our Style Scores system to help ELY earn a “B” VGM score. The company has also crushed our quarterly earnings estimates by an average of 224% in the trailing four periods, including a 48% beat last quarter.

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