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Tuesday, July 21, 1998
Callaway Golf
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Phone: 760-931-1771
Website: www.callawaygolf.com
Price (7/20/98): $20 1/16
HOW DID IT FIND TROUBLE?
Big Bertha is slimming down. Callaway Golf, the company behind the revolutionary lightweight golf club, has putted from the rough before. After the oversized driver was introduced in 1991 to critical acclaim, many figured it would be a fad. As Big Bertha went on to improve the golf game of pro and amateur alike, the naysayers hushed on the green. Then, even though imitation may be the sincerest form of flattery, the company was besieged with clones and counterfeiters.
The company rose above the pressure, however. With Callaway-equipped golf pros winning tournament after tournament, it was hard to deny the success of the name atop the leader board. All was going well and then, this past February, rumors began to circulate that Nike <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NKE)") else Response.Write("(NYSE: NKE)") end if %> was interested in buying the company. The marriage made sense. Both were elite brands in what were otherwise athletic commodities. It was Tiger Woods, from head to toe. Business Week's "Inside Wall Street" column was lining up for the tossed bouquet. Speculators bid up the stock like bachelors chasing an aerial garter belt. There were two problems, though:
There was no marriage.
Bogey!
The fundamentals were falling apart.
Double bogey!!
For a series of foreign reasons, from the Asian flu snuffing out sales in the Far East to El Ni�o wreaking havoc on winter-friendly golf courses, earnings fell like a Jack Nicklaus shot a foot away from the cup. With inventories and accounts receivable rising while selling prices and profit margins were falling, no club in Callaway's bag of tricks could free itself from this equity bunker. Investors shouted, "Fore! Get it?"
BUSINESS DESCRIPTION
Callaway Golf makes and sells golf equipment. The colorful Ely Callaway was so impressed when he came across the early version of the Big Bertha that he bought the company. Never short on ego, he named the company after himself. The ticker symbol bears his first name.
FINANCIAL FACTS
Income Statement
12-month sales: $850.8 million
12-month income: $119.4 million
12-month EPS: $1.67
Profit Margin: 14.0%
Market Cap: $1,388.3 million
Balance Sheet
Cash: $14.4 million
Current Assets: $340.0 million
Current Liabilities: $128.7 million
Long-term Debt: $8.4 million
Ratios
Price-to-earnings: 12
Price-to-sales: 1.6
HOW COULD YOU HAVE SEEN IT COMING?
Growing up is never easy, and Callaway is now in that awkward adolescent stage between a young growth company and a mature one. Earlier this decade the up and coming clubber quickly gobbled up market share. Spectacular earnings growth over the company's first few years of publicly traded life were great but not likely to be sustained. Now that the company is dominant, there just isn't much market share left to take. Improving on the Big Bertha with the titanium-based Great Big Bertha and introducing new lines of irons and putters was nice, but they, too, had their limits.
So, like its once rumored soulmate, Callaway took to clothing. But this was no Nike. The swoosh was universal. For Callaway, beyond venues in pro shops and high-end department stores, there just wasn't the same urban and suburban fashion demand for the proven brand that Nike had made. Don't blame Callaway. Blame the sport.
But making the Nike association would have come in handy as just three days before Callaway spooked the market by predicting that earnings for the March quarter could come in as low as a third that of analyst expectations, Nike pre-announced a shortfall as well. For Nike it was Asian order cancellations, and while that was just one aspect of Callaway's problems, a sharp Fool could have seen the clouds coming in time to pack the clubs, speed off in the golf cart, and wait the storm out in the clubhouse.
WHERE TO FROM HERE?
Kenny Loggins sang "I'm all right" as the theme for Caddyshack, but Callaway is humming a different tune. The overseas markets show no sign of improvement and the overstocked company will probably continue to discount clubs -- not to grow market share, but just to maintain it domestically.
The only thing that has gone Callaway's way lately is when the United States Golf Association (USGA) ruled last month that existing clubs will continue to be legal on the PGA tour. That's right, the golf committee was debating the validity of performance enhancing clubs like Big Bertha and the purists lost what could have been a kiss of death for the company. Not that the USGA was expected to rule against the company -- after suffering through the political correctness of deciding whether or not Casey Martin should be allowed to ride a cart in PGA tournaments, the last thing purists needed was to be accused of trying to put a half-dozen golf companies out of business.
Where does this leave shareholders? Far from the green and deep in the rough in the near term. As earnings decline, that deceptively cheap P/E multiple will widen. But keep an eye on the Asian crisis for signs of improvement and a falling U.S. dollar. For a company priding itself on its California-based club production, that is the perfect export picture for a return to growth. Asia is going to be an important market for Callaway, proof being that the latest addition to the board of directors was the Chairman of Fuji-Xerox. While this is long-term optimism, nobody knows how long the short-term malaise will continue -- and it will continue.
-Rick Aristotle Munarriz
([email protected])
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