Callaway Golf Co (NYSE:ELY) is an elite golfing company that makes clubs, balls, and accessories. It’s a big sponsor of major tournaments and athletes, and it used the 2020 halt of golf tournaments as an opportunity to buy Topgolf for “just” $2 billion.
This gives it a strong consumer presence in a socially distanced sports bar and restaurant concept. You’d likely kill for a set of their high-end clubs, so is Callaway Golf stock a Buy?
The company did well in spite of worldwide sports generally coming to a fast stop. That’s because golf courses weren’t shut down as extensively. It’s one of few leisurely outdoor activities that didn’t get banned en masse by stay-at-home orders. Not only that, but the lack of alternatives fueled growth, with holiday golf activity up.
Although Topgolf suffered from the closures, the buyout was impeccably timed and could in hindsight be a deal if the economy picks up soon enough. It represents more than just a restaurant for Callaway – Topgolf is a place to sell its merchandise.
Will Callaway and Topgolf drive investors to an eagle or leave their portfolios with a mulligan?
Demand For Golf Spiked During Lockdowns
Callaway Golf Company is a Carlsbad, California-based golf equipment manufacturer. It typically sells through golf and sporting goods retailers and markets across 70 countries around the world. It also has an e-commerce presence, and, thanks to its Topgolf acquisition, has its own retail brand.
Besides its namesake brand, the company makes and sells Odyssey, OGIO, TravisMathew, and Jack Wolfskin brands.
The company also has a series of endorsement deals with golfers like Phil Mickelson, Henrik Stenson, Jon Rahm, and Xander Schauffele. It continues making innovations in both clubs and balls, along with clothing and other accessories related to the game.
Besides March and April, golf became much more popular than it was in 2019. The sport is perfect for getting fresh air outside, and course courtesies dictate generally acceptable social distancing. This resulted in up to 20 percent more golfers to hit the course in 2020.
This has bullish investors wondering if Callaway Golf stock is a worthwhile investment.
Is Callaway Golf Stock A Buy?
Callaway Golf Co began the year with a market capitalization of over $2.5 billion. It traded at a very reasonable price-to-earnings multiple of around 25x then.
The company used to pay a dividend through the 2010s, but the final $0.01 quarterly cash payment was in May 2020. As financial concerns rose, the company suspended its dividend and it has yet to resume these payments.
It saved a pretty penny on its Topgolf buy, as it was rumored to be valued at around $4 billion when it sought a SPAC IPO before global lockdowns sliced its valuation. And the company seems to have investor sentiment as a recovery stock vs a pandemic stock.
Third quarter results were solid though. Net sales of $476 million for the quarter led to $52 million in net income. That represents a slide of 12 percent and 69 percent, respectively, from the same period of the prior year.
By remaining profitable (and growing) through the pandemic and also being associated with recovery, Callaway is well positioned for success. It has the best of both worlds, although it could also be a double-edged sword for ill-prepared investors.
Golf Is Discretionary, And That’s A Problem
Callaway Golf products are a discretionary purchase at the end of the day. While people rushed towards golfing in 2020, it’s arguable that government stimulus spurred participation. Those funds will inevitably run completely dry, and that will leave people tightening their purses.
Golf has a high barrier to entry – clubs, bags, and balls aren’t cheap, especially Callaway- and Odyssey-branded ones. It’s a sport typically associated with the wealthy and elderly, but today’s elderly are still working.
Approximately 20.8 million people are retired in 2021, and those people are often working in the gig economy to kill time instead of playing golf. As the market gets more turbulent, Callaway could find itself stuck in the rough.
Not every investment is a hole-in-one, and it’s a big ask to invest in a company near a historic high in price. ELY share price hasn’t been this high since 1998. Golf is more popular right now, but it could lose its luster in the future.
Can Nike Muscle In On Callaway’s Turf?
Although it’s one of the premium golfing brands, Callaway isn’t alone. It faces competition from Nike Golf, TaylorMade, and Ping on every level.
Startups are trying to get in on the action as well, and the best way to reach the average consumer is through either the PGA or a place like Topgolf.
Topgolf could end up being the secret sauce for Callaway’s future success. It gives it an advantage that others don’t have, because it can completely control the retail and marketing within its own properties.
Nike (NKE) has a formidable retail footprint, but the other brands need to hope Callaway’s gambit fails. Otherwise, they will need to rush into the miniature golf game to compete.
Is Callaway Golf Stock A Buy? The Bottom Line
Callaway Golf is an American golf company that makes clubs, balls, and accessories. It’s a mainstay on the big pro tours and a respected brand in the sport. The company had no problems recovering from the global impact of the pandemic on sports, but it wasn’t until the holiday season that its stock broke out in earnest.
That could provide a buying opportunity for those who believe in its next generation of golf. The purchase of Topgolf at $2 billion represents a great discount. It was on a growth spurt when the first wave of lockdowns hit the sports bar industry and it has accelerated since then.
When the economy recovers, Callaway’s bet is controlling this golfing hotspot will open a unique stream to sell its products somewhere its competitors can’t play.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.