If you had told me that Callaway Golf Co (NYSE:ELY) would deliver a quarter that would make me sit up and take notice, I would have said you got hit in the head once too often with a golf ball. Yet this is exactly what happened when the equipment maker delivered a big jump in revenues. ELY stock is worth taking a closer look at.
Callaway management took a different approach in 2017, focusing on making strategic acquisitions and rolling out new products. This seems to be working. For the year, sales were up 20%, lifting by $178 million to $1.05 billion, driven by the launch of the EPIC Woods & Irons lines. The woods’ sales grew 42% to $307 million, while irons and putters fell, balancing to the entire line growing by 10%.
Golf ball sales previously had not really been growing. I want to make a joke and say that’s because golfers got really good and not sending slices into lakes, but the facts are ball sales rose almost 7% to $162 million.
There had been a lot of skepticism about Callaway’s purchases of Ogio International and TravisMathew, but ELY executed and sales grew almost 80% to $243 million.
Driving Strong Margin Improvement
This all resulted in a 160-basis-point increase in margins to 45.8%. After backing out all the non-recurring expenses from several accounting matters including the impact of the Ogio and TravisMathew deals, earnings were 53 cents, more than doubling from 24 cents.
Even if we just look at Q4, sales increased 17% to $192 million. Gross margin was up 300 bps to 41.6%.
ELY stock should find good news in the National Golf Foundation’s most recent annual report, which showed encouraging numbers. Callaway may be able to build on these trends with its more aggressive approach.
There was a 14% increase in beginning golfers, now at 2.5 million, an all-time high.The number of “committed golfers” grew to 20.1 million golfers, the first year-over-year increase in five years.
At the Start of an Uptrend
We also are seeing a new trend that should help ELY stock a lot going forward — the Topgolf concept. ELY owns a stake in the company. The concept is a center that contains golf games, bar, restaurant and other activities. These “off-course golf participants” grew 11% to more than 20 million. And of those, some 40% — or 8 million people – have never played on a golf course. That just creates increased interest in the sport. Topgolf is also making a lot of money and that helps Callaway golf stock.
The NGF even says that non-golfers interested in playing golf number some 12.8 million, up from 11.9 million last year, double what it was five years ago.
Even more encouraging, the number of millennials who express interest in golf is now at 15 million.
Callaway may be at the beginning of an uptrend here, wrapped in secular tailwinds. With $85 million in cash, and a $70 million investment in Topgolf now worth almost $300 million, and holding no debt, ELY is worth looking at.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.