Dueling Fools
June 9, 1999

Callaway in the Rough
The Bull Rebuttal
by Warren Gump ([email protected])

The one item that really stuck in my mind after reading Paul's argument was the series of complaints about Ely Callaway and his "advanced age." While the Chairman is certainly not a young buck, he seems fully capable of managing his company. I think you need to dig a little deeper than someone's nominal age to determine whether they are fit to run a company. With the drastic actions taken last year to realign and refocus the company, it is obvious to me that Mr. Callaway has the stamina and drive necessary to lead the company for now. That being said, it will be important for Mr. Callaway to develop a strong management team that will be able to succeed him.

Certainly, Callaway Golf faces the risk that competitors will improve their clubs and the market will tighten. That hazard is omnipresent for all companies. One of the reasons I'm so confident that Callaway will be successful is its strong brand. I don't play golf myself, so I can't personally evaluate all of the technical advances in new clubs and other developments. Instead, I rely on information gleaned from the best source on golf that I know, my Aunt Sally. As someone who hits the golf course more regularly than she eats, Aunt Sally knows a thing or two about golf. She's been a Callaway fan for years and seems willing to try out any product it offers. That's the kind of loyalty that is a trademark of successful companies.

Paul makes a valid point that Callaway doesn't make a repeat purchase product. With its clubs being of such high quality, a set will last a lifetime for many golfers. That's one of the reasons for the company's move into golf balls. Here is a repeat purchase item that duffers will purchase over and over again, providing a recurring revenue stream. As Father's Day approaches, millions of balls will be purchased for loved dads and granddads throughout the nation. Next year, I bet that many of those balls will be embossed with the Callaway name.

Will Callaway's ball be superior to the competition? I can't answer that question, but given the company's success in introducing innovations in the club business, I think it has earned the benefit of the doubt. Callaway has been on the cusp of many advances in golf equipment this decade, and there is no reason to believe that it might not revolutionize golf balls.

The idea of revolutionizing golf balls sounds inane when you first hear it. However, think of another recent innovation that caught some people off guard. How many people would have thought that Gillette <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: G)") else Response.Write("(NYSE: G)") end if %> could once again bring a major new shaving product to market? By investing in research and development and understanding customer's needs, Gillette created a product that has been embraced by many men throughout the world. The same could be true for Callaway. By investing huge sums into the development of a golf ball, the company could take away substantial market share from entrenched competitors, particularly with its strong brand name.

If Callaway's stock were priced for certain success in its turnaround and golf ball venture, I probably wouldn't be attracted to the company. What catches my interest is the ability to purchase into this powerful brand at a price of less than 20x earnings projections for this year. Remember, we're talking about a company that has no long-term debt, has reined in inventory and accounts receivable problems, and is preparing to embark on a major new product launch. Will Callaway definitely succeed? I can't tell you. Do I think the risk/reward characteristics look favorable? Absolutely.

Next: The Bear Responds