As one of the sports that allows for social distancing, golf 's popularity climbed last year as many people were drawn to it as a preferred leisure activity amid the coronavirus pandemic. To capitalize on this trend, golf equipment manufacturing companies have been designing golf balls and other equipment that better suit beginners. Furthermore, tournament organizers have been making changes, such as conducting short competitions and improving golf courses. As a result, the global golf equipment market is expected to grow at a CAGR of 5.8% over the next three years.
Popular golf equipment manufacturers Callaway Golf Company (ELY) and Acushnet Holdings Corp. (GOLF) are well positioned to capitalize on the industry tailwinds.
Both stocks generated significant returns over the past year. While ELY returned 165.7% over this period, GOLF gained 88.8%. However, because people are now focusing on other outdoor activities as mass vaccinations take effect, ELY has lost 6.4% over the past month, while GOLF slumped 3.8%. So, which of these stocks is a better pick now? Let's find out.
Latest Movements
Last month, ELY completed a merger with Topgolf International, Inc. to create an unrivaled, tech-enabled golf company that delivers leading golf equipment, apparel and entertainment. Also last month, ELY launched its new Chrome Soft X LS Golf Ball that promotes low spin for maximum distance, with Tour level short-game control. In January, the company introduced new ERC Soft, Supersoft and Supersoft MAX Golf Balls, which promote fast ball speeds and outstanding greenside control. It also announced its new family of Epic Drivers and Fairway Woods. A new family of Apex Irons and Apex Hybrids was also launched.
Meanwhile, GOLF paid a quarterly cash dividend of $0.17 on March 26. The company is looking forward to introducing a full lineup of new products for the forthcoming 2021 golf season. The company’s Titleist golf balls remain trusted by approximately 75% of players worldwide. The new Pro V1 and Pro V1x model golf balls deliver stunning performance and quality. Titleist TSi metals have been the most played driver on the PGA Tour since its debut. Its new Premiere series in the FootJoy Golf Wear segment was the #1 Shoe at the Masters, and its new HyperFlex is its latest entry in the athletic golf footwear category.
Recent Financial Results
ELY’s net sales for the fourth quarter, ended December 31, 2020, increased 20.1% year-over-year to $374.63 million. Net sales from the Golf Clubs category increased 48.5% to $170.45 million. Its non-GAAP gross profit increased 5.5% year-over-year to $139.40 million. Its net cash provided by operating activities came was $228.24 million as of December 31, 2020, up 163.7% year-over-year. It had cash and cash equivalents of $366.12 million at the end of period.
However, ELY suffered a $32.26 million loss from operations, compared to a loss of $22.66 million in the prior-year period. Also, the company’s non-GAAP net loss came in at $31.04 million for the fourth quarter, compared to a $24.19 in the fourth quarter of 2019. Its non-GAAP EPS was $0.33, compared to $0.26 in the year-ago period.
For the fourth quarter ended December 31, 2020, GOLF’s net sales rose 14.2% year-over-year to $420.49 million. Its golf gear segment provided net sales of $29.20 million, up 24.8% year-over-year. The company’s gross profit increased 18.1% year-over-year to $220.40 million. Its income from operations declined 5.2% to $27.09 million. Its net income was t $21.60 million for the quarter, which represents an improvement of 20.9% year-over-year. And its EPS for the quarter increased 20.8% year-over-year to $0.29.
Also, net cash flows provided by operating activities were $264.43 million as of December 31, 2020, up 96.9% year-over-year. Cash and cash equivalents of $151.45 million at the end of the period represented an improvement of 343% year-over-year.
Past and Expected Financial Performance
ELY's revenue and total assets grew at CAGRs of 14.9% and 26%, respectively, over the past three years. The CAGR of the company’s EBITDA has been 6.8% over the past three years.
Analysts expect ELY’s revenue to increase 72.3% in the current year and 20.9% next year. Its EPS is expected to decline 233.3% in the current quarter, 153.7% in the current year, and then rise 147.2% next year. ELY’s EPS is expected to grow at a rate of 30.9% per annum over the next five years.
In comparison, GOLF’s revenue and total assets grew at CAGRs of 1.1% and 2.5%, respectively, over the past three years. The CAGR of the company’s EBITDA has been falling by 1.2% annually over the past three years.
Analysts expect GOLF’s revenue to increase 31% in the current quarter, ending June 30, 2021, 8.4% in the current year and 2.5% next year. However, its EPS is expected to increase 1733.3% in the current quarter, 35.9% in the current year and 6.3% next year. Furthermore, its EPS is expected to grow at a rate of 5% per annum over the next five years.
Profitability
GOLF’s trailing-12-month revenue is 1.3 times ELY’s. Also, GOLF is more profitable, with a gross profit margin of 51.5% versus ELY’s 41.4%.
However, GOLF's ROE of 10.2% compares favorably with ELY’s negative value.
Valuation
In terms of forward non-GAAP P/E for the next fiscal year, ELY is trading at 171.18x, 687% higher than GOLF’s 21.75x. Also, in terms of forward EV/EBITDA, ELY’s 27.79x is 101.8% higher than GOLF’s 13.77x.
In terms of price/cash flow, ELY’s 22.57x is 82.8% higher than GOLF’s 12.35x.
Thus, GOLF looks more affordable here.
POWR Ratings
While ELY has an overall C rating, which translates to Neutral in our proprietary POWR Ratings system, GOLF has an overall A rating, which equates to Strong Buy. The POWR Ratings are calculated by considering 118 different factors with the weighting of each optimized to improve overall performance.
Both ELY and GOLF have a Momentum Grade of B because of their impressive price gains over the past year.
However, in terms of Quality Grade, GOLF has been graded an A, which is consistent with its significantly higher-than-industry profitability ratios. But ELY has a Quality Grade of C, which is reflective of its negative ROE. Also, compared to a Growth grade of B for GOLF, ELY’s Growth of D signifies analysts’ low or negative consensus estimates for the stock.
Of 33 stocks in the A-rated Athletics & Recreation industry, GOLF is ranked #3, while ELY is ranked #31.
Beyond what we’ve stated above, our POWR Ratings system has also rated both ELY and GOLF for Value, Stability and Sentiment. Get all the ELY ratings here. Also, click here to see the additional POWR Ratings for GOLF.
The Winner
People adopted the habit of playing golf during the pandemic, which is expected to continue in the coming months. This, along with structural developments and coming golf tournaments, is likely to drive ELY and GOLF to fresh highs. However, GOLF appears to be a better buy based on the factors discussed here. Compared to GOLF, ELY is overvalued and
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Athletics & Recreation industry.
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ELY shares were trading at $28.81 per share on Thursday afternoon, down $0.12 (-0.41%). Year-to-date, ELY has gained 19.99%, versus a 11.49% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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