Is Callaway Golf a good play in the recession?

CHICAGO Fri Jun 19, 2009 3:38pm EDT

CHICAGO (Reuters) - Callaway Golf Co's (ELY.N) shares have slid almost 56 percent since the beginning of 2008 as consumers dial back spending on discretionary items, including the golf clubs, balls and other equipment the company makes.

That decline is greater than the Dow Jones industrial average .DJI and the Standard & Poor's 500 index .SPX, which have declined about 40 and 42 percent, respectively.

Based in the seaside town of Carlsbad, California, 30 miles north of San Diego, Callaway, like all golf equipment companies, has been hurt by the slow decline over the last few years in the number of Americans playing golf, and now feels even more pressure from the recession and rising unemployment.

Callaway's fourth-quarter loss met expectations back in January, but at that time it did not give a 2009 forecast, citing uncertain consumer spending and foreign currency fluctuations, as about half of its sales are overseas.

It is scheduled to provide a financial update on Thursday after the market closes.

For now, analysts on average expect Callaway to post a profit of 42 cents per share when it reports first-quarter results on April 30, down from 61 cents a year ago.

Callaway shares now trade around $8, while price targets on the stock range between $6 and $16, according to Reuters Estimates.

Has the golf market bottomed out or should investors wait for further weakness to play out?

'LOST YEAR' AHEAD

Callaway sells golf equipment under the Callaway Golf, Odyssey, Top-Flite and Ben Hogan brands in more than 110 countries. Products range from the $15.99 Warbird golf balls to the new $499 FT-iQ or $299 Big Bertha Diablo drivers.

Its sales hit a record $1.13 billion in 2007 before slipping to $1.12 billion in 2008. Things are not getting any easier as analysts said the negative impact of currency is likely to top 40 cents in the first quarter.

"We just see this year as almost a lost year in terms of the golf business," said Stifel Nicolaus analyst Tom Shaw, who has a "hold" rating on Callaway shares.

Instead of sales in the industry declining 5 to 10 percent as Callaway previously expected, initial comments from retailers suggest it will be more in the range of 17 to 20 percent, said Wedbush Morgan Securities analyst Rommel Dionisio, who has a "sell" rating on the shares.

That may be a reason why Callaway this week launched a sales promotion where consumers buying one of its three new drivers will receive fairway wood clubs ranging in value from $200 to $400 for $1, he said.

"To do so this early in the golf season is obviously very concerning," Dionisio said, adding that Callaway may lose market share this year in the lucrative driver market to Adidas AG's ADSG.DE TaylorMade and Nike Inc.(NKE.N)

With most of the golf business done in the first half of the year, a sales war is a bad sign for the sector, Shaw said.

NO DOWNSIDE

However, most analysts agree Callaway boasts a strong balance sheet and one of the best golf brands.

And the new drivers are doing better than expected as the company is using them to clear out unwanted fairway wood inventory, Gilford Securities analyst Casey Alexander said.

In fact, the stock is likely to rebound as things improve, said Alexander, who has a "buy" rating on the stock and also runs a small hedge fund that holds Callaway shares.

"Tangible book value is a little better than $6 a share and the stock is sitting at $7.66, so there's a very little downside," he said, adding that a potential return of 50 percent or more over the next year is more likely.

Throw in the growing number of baby boomers -- the age group that buys more than half of all golf gear -- and a target audience that is better off than the average consumer and you have the makings of a strong rebound, said Alexander.

(Reporting by Ben Klayman, editing by Matthew Lewis)

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.