Tiger Woods won the Wachovia Championship yesterday in impressive fashion, his third title of the year, putting him solidly in first place in the Fedex Cup standings. Almost as impressive were Callaway Golf Company’s (ELY) first quarter earnings, announced last Thursday. Sales were up 11 percent, operating profits up 54 percent and fully diluted earnings per share up 44 percent to $0.49. These are fantastic numbers given the funk both the company and the industry have been in for the last several years.
In an earlier post about Adams Golf(ADGO), I mentioned towards the end of it that there were more golf course closures than openings in 2006 for the first time in 6o years. In true contrarian fashion, I felt this was an indication the golf industry had hit rock bottom and it was time to start recovering. Callaway’s report and guidance for the rest of 2007 is proof that I might in fact be right. As a big fan of golf, I hope so.
Callaway has been working hard to fatten its margins while getting the right products to their customers as efficiently as possible. The second quarter numbers will confirm if they’ve managed to figure out the process. I believe they have despite the fact their golf ball business continues to tread water. Fortunately, the division does make money so it’s not a drain on the company. Sales were positive in every segment (woods, irons, putters, accessories) except golf balls. Accessories managed a 28 percent gain, the highest by quite a bit. Even more impressive, iron sales almost eclipsed woods in the quarter, missing by just $3 million. Geographically, sales in Asia and Japan were both robust, growing 34 and 45 percent respectively. Both gross and operating margins improved five percent quarter to quarter, signaling the company is heading in the right direction.
I’ve set the table and now I need to finish. Financially, the company is healthier then it’s been in years at a time when the golf market is in a weakened state. Golf, like many things in life is cyclical in nature. It will see better days sooner than later. Right now, the stock is a little expensive, trading at 52 times earnings, a price to sales ratio of 1.3 and a PEG ratio of 1.6. Should the company achieve their guidance for 2007; the forward numbers look much more attractive. Both the PEG and price to sales would be at or below 1 and the price to earnings close to 20. All numbers more palatable to all you GARP (growth at a reasonable price) investors I would think.
It’s hard to tell whether Phil Mickelson is a part of Callaway’s resurgence or not but it certainly doesn’t hurt to have one of the games best and most colorful players on your side. In the end, I believe it’s immaterial. What will benefit the company the most is solid business fundamentals combined with favorable demographics.
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