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Callaway Golf falls after analyst cuts rating

NEW YORK (AP) -- Shares of Callaway Golf Co. slumped Friday after a Raymond James analyst downgraded the stock, saying the weakening Japanese yen jeopardizes Callaway's profit.

THE SPARK: Analyst Dan Wewer lowered his rating to "Market Perform" from "Strong Buy" and lowered his income and sales estimates for the company, which were the highest among analysts surveyed by FactSet. The company gets about a third of its revenue from Japan and Europe, and Wewer said a weaker yen and British pound will hurt the company's income and sales.

"The primary reason for our reduced outlook is the sudden and significant devaluation of the Japanese yen, and to a lesser extent similar challenges with the British pound," he wrote.

Wewer added that Callaway shares have been strong over the last six months. His downgrade takes Callaway shares two notches lower. A "Strong Buy" rating means the analyst thinks a stock will outperform the Standard & Poor's 500 over the next six to 12 months and produce a return of at least 15 percent, while the "Market Perform" rating means the stock should trade in line with the S&P 500 over the next year.

Wedbush analyst Rommel Dionisio took a more optimistic view, saying the softer yen and Callaway's restructuring plans will weigh on results this year, but the company will return to profitability in 2014. He kept an "Outperform" rating on the stock.

THE BIG PICTURE: The value of the yen has declined significantly in recent months. Prime Minister Shinzo Abe, who took office in December, has supported an aggressive monetary policy intended to end years of deflation and get consumers and companies to spend more money. Recently the country's central bank pledged to double the money supply to achieve a 2-percent inflation target within two years.

As a result the yen has weakened against the dollar. A single dollar now buys around 100 yen, compared to about 81 yen a year ago. Wewer said the yen has declined about 16 percent against the dollar in 2013.

Callaway's sales fell 6 percent to $832 million in 2012. For the year, revenue in Japan rose 5 percent to $146 million while European revenue fell 10 percent to $120 million. The company expects a partial recovery to $850 million in 2013.

Wewer lowered his estimates, saying he now expects Callaway to report net income of 11 cents per share and $850 million in revenue in 2013, down from 16 cents per share and $871 million in revenue.

Analysts expect the company to take a loss of 2 cents per share on revenue of $850.9 million, according to FactSet.

SHARE ACTION: Callaway shares lost 41 cents, or 5.9 percent, to $6.59 in midday trading. The stock slumped after Callaway reported its third-quarter results and cut its guidance in late October, but it has advanced 28 percent since Oct. 31.