Callaway Golf (NYSE: ELY) is back and better than ever and there are great reasons to ignore the noise and buy the turnaround for Callaway Golf stock.
Callaway’s rough road began with the financial crisis. Like many American past times, the golf industry was hit hard by the downturn. Shares of Callaway fell from almost $20 per share in 2007 to around $5 per share in 2009.
A new management team took the reins in early 2012. From May 2012 to April 2014 the stock rose almost 70%, nearly double the performance of the S&P 500.
The stock rose 23% in March 2014 alone but, after a series of negative news releases relating to the golf industry, the stock is now down over 20% from April highs.
A brief timeline for the decline of Callaway Golf stock.
- April 23 – Callaway beats earnings expectations but offers disappointing guidance. Callaway stock falls 8% the next day.
- May 6 – Adidas reports that its Taylor-Made division saw net profit fall by 34% in the first quarter. On the same day, Callaway hosts analysts in New York and reiterates its previous guidance numbers. Callaway stock falls 6% over the next three days.
- May 20 – Dick’s Sporting Goods (NYSE: DKS) reports weak earnings and lowers guidance, citing weakness in golf as a major reason. Callaway stock falls 9%.
Why the news above is misleading.
One could assume that, based on the Dick’s report, Callaway’s sales were dismal at Dick’s stores. One could also assume that Callaway’s sales are weak since Taylor-Made’s profit fell by 34%. Based on the market’s reaction to these news stories, clearly a lot of people did make these assumptions.
But I don’t believe these assumptions are accurate.
With such a tremendous decline in Taylor-Made’s sales it is entirely possible that weakness at Dick’s was an issue with its reliance on Taylor-Made merchandise and not an issue with Callaway’s sales.
Callaway has also been quietly stealing market share from Taylor-Made over the past year. That makes me think that perhaps weakness in earnings reports from Taylor-Made and Dick’s have little to do with Callaway.
Why you should buy the Callaway Golf stock turnaround.
Considering that I believe the reasons for Callaway’s recent share price decline are unfounded, I see an opportunity for the stock to recover those losses in the short-term. But if you need more reasons to buy the Callaway Golf turnaround here are four.
Callaway’s international sales are very strong. 52% of the company’s revenue came from overseas in the first quarter, a figure that grew 30% compared to last year.
In 2013 Callaway announced a 20% stake in TopGolf, which operates indoor golf simulators. Think of it as a cross between a driving range and a sports bar. Considering the company’s plans for expansion, this equity stake could prove to be a valuable asset for Callaway.
Perry Ellis (Nasdaq: PERY) licenses the Callaway brand and produces its apparel. On a May 22 conference, Perry Ellis management stated that sales of its Callaway branded merchandise were up 30%. It also reported that strong sales of Callaway’s hard goods (golf clubs) were driving sales of its apparel.
That sounds like a very different story than the one we heard from Dick’s.
Finally, Callaway’s weakness following the financial crisis is now fueling its turnaround. Since the company suffered significant financial losses, these losses can be carried forward in the form of federal and state tax credits. These should boost the company for the next several years.
Callaway Golf stock: The bottom line.
Callaway is an iconic golf brand. The company is involved in all things golf and seems to have put its dark days behind it.
The company has a strong management team, strong international sales, is increasing market share in its golf club division and has strong sales in its apparel division. Factor in the tax credits from previous losses and its stake in TopGolf and there are great reasons to buy the Callaway golf turnaround.
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