Callaway Golf: Putting Profits

10/17/2018 5:00 am EST

Focus: CONSUMER

Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

Callaway Golf (ELY) is all about golf equipment, including woods, irons, putters, golf balls, gloves bags, umbrellas and all the rest, notes growth stock expert Mike Cintolo, editor of Cabot Top Ten Trader.

Golf isn’t exactly a growth industry, but Callaway has a history of slowly growing revenue, with two exceptions. The first exception was 2015, when revenue fell by 5% and the second was 2017, when revenue galloped ahead by 20%.

The factors in this resurgence, which have produced 30% growth in Q1 and Q2 this year, are the halo effect that Tiger Woods’ return to competitive golf has on the game’s popularity and Callaway’s profitable investment in Topgolf, a string of entertainment venues that feature driving ranges, food, music and games.

Topgolf is expected to expand to between 80 and 100 locations, and Callaway’s $71 million dollar investment (a 14% stake) is forecast to be worth $600 million by 2020. Callaway’s earnings report for the second quarter on August 2 revealed record net sales and earnings — EPS up 85% and revenue up 30% — and was accompanied by increased full-year guidance.

The company had previously declared a quarterly dividend of a penny a share. Callaway is riding a wave right now, but has a history of steady growth.

ELY went through the wringer from 2007 (when it was trading just below $20) to October 2011, when it bottomed at $4.70. The stock had another bad year in 2014, but grew steadily until March 2017, when its relative performance line really got moving. ELY shot from $13 to $21 in the first half of 2018, but pulled back below $20 heading into earnings.

The great Q2 report on August 2 gapped the stock to near $24, and it has been digesting that gain with sideways trading since, ignoring the market’s flip-flops. If you like the story, you can take a small position around $23, with a stop around $21.

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