Monday, November 16, 1998
Family Golf Centers Inc.
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FGCI)") else Response.Write("(Nasdaq: FGCI)") end if %>
Phone: 516-694-1666
Website: www.familygolf.com
Price (11/13/98): $21 1/16
HOW DID IT DOUBLE?
In golf and investing the goal is the same -- aim for the green. For Family Golf Centers, hitting the sweet spot and landing shareholders on the green has come courtesy of rapid-fire acquisitions and a return to Wall Street favor.
The company was rolling along when the market sentiment for golf stocks fell into a bunker. With equipment makers like Callaway Golf <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ELY)") else Response.Write("(NYSE: ELY)") end if %> reporting bleak earnings with no relief in sight, Family Golf followed the sector into the rough in the summer.
However, with sales momentum coming from relentless consolidation as Family Golf has bought up both the mom and pop driving ranges as well as the established leaders, it quickly stepped up and landed on the leaderboard. After hitting an intraday low of $10 a share just last month, the shares have now raced back for a double.
BUSINESS DESCRIPTION
New York-based Family Golf has more than 120 golf centers, and growing, anchored primarily by driving ranges. True to the "Family" name, the centers offer other family diversions, from video games to miniature golf courses for the children, and even junior golf programs for toddlers as young as four. Meanwhile, the parents hit the lighted, and sometimes even seasonally heated, driving ranges.
FINANCIAL FACTS
Income Statement
12-month sales: $111.1 million
12-month income: $2.8 million*
12-month EPS: $0.14*
Profit Margin: 2.5%
Market Cap: $530.8 million
(*Excludes extraordinary items.)
Balance Sheet
Cash: $51.9 million
Current Assets: $88.1 million
Current Liabilities: $48.4 million
Long-term Debt: $70.5 million
Ratios
Price-to-earnings: 150.4
Price-to-sales: 4.8
HOW COULD YOU HAVE FOUND THIS DOUBLE?
Family Golf lined itself up for a Fore score and it was easy to see why. Over the past few years, in a sleepy, predominantly privately owned driving range sector, the company has taken advantage of being a publicly traded player with access to new capital through share offerings and expanded lines of credit.
By offering new shares as legal tender (as was the case in five acquisitions in the second quarter alone this year), or even cash when it came time to buy the Jack Nicklaus-licensed Golden Bear centers, Family Golf had the roadmap to equity success. By paying private sector discounted prices on troubled driving ranges, updating them, and then reaping the benefits of the purchased centers as accretive to earnings, the company was able to grow revenues without missing much of a step on bottom line growth (despite the new shares issued).
Case in point, earlier this year the company bought out Eagle Quest, the country's second-largest driving range operator. Eagle Quest was born in 1996 and set out to steal a play from Family Golf's playbook in consolidating the independents. However, the company never got its fiscal act together and over the first two years Eagle Quest lost a total of $13.6 million. Things were going so badly for Eagle Quest that sales at the onsite pro shops (where Family derives a fourth of its total revenues on merchandise sales) were cut in half simply because it did not have the working capital to fund inventory purchases.
Family Golf was able to buy them at a pittance of just over a million shares of Family Golf stock, and, as the chain gets tweaked into the family friendly signature, it should provide another great asset for the company.
Scenes like this have played out again and again, and Family Golf had been a steady performer. The October tumble to $10 was an illogical bogey. Callaway and most of other club makers found sales overseas, primarily in Asia, crumbling. Yet Family Golf has no global exposure beyond its locations in Canada and the United States.
So with the tag misplaced, it was easy to see why Family Golf would bounce back -- and it did.
WHERE TO FROM HERE?
Size does matter, in both oversized clubs and in oversized driving range center companies. The acquired explosion in sales has helped operations. For instance, selling, general, and administrative costs have been cut to just 12% of total revenues from 17% a year ago.
Meanwhile, those who grew weary of the $69 million debt load the company had on its books back in June can relax. A month later the company had a 4.6 million share secondary offering, raising $106 million.
Analysts expect earnings to more than double to $1.28 a share next year. As the New York company has grown its base of stores in the South, it is now less seasonally dependent than it was just two years ago. That places the company at a compelling valuation of about 20 times earning estimates while the growth rate over the next few years is pegged at 30%. Further, after swallowing up both the second and third largest driving range operators this year (Eagle Quest and Golden Bear), the company is now left with no other well-financed competitor to bid on remaining properties. So the tee party should continue, like a birdie soaring ever higher.
-Rick Aristotle Munarriz
([email protected])