Imperial: Callaway Has Long Range Potential, 36% Upside

Imperial Capital’s George Kelly initiated coverage of Callaway Golf Co ELY with an Outperform rating and price target of $12.

Stock Upside

Kelly believes that the stock has upside potential, driven by the possibility of margin expansion and the company’s balance sheet assets.

Kelly explained that “Callaway has been beset by a number of challenges. After a tough couple of years in golf, when participation and spending showed little post-recession rebound, FX rate collapsed in 2014 and 2015, adversely affecting 50 percent of Callaway’s business.”

These factors mitigated the impact of the brand’s large market share gains and profitability turnaround. However, Kelly believes that the company’s turnaround would become more evident over the coming years.

Golf Stabilizing

According to the Imperial Capital report, “Recent comments by management, retailers and industry sources point to a stabilization in golf.”

However, both spending and participation continue at below the pre-recession levels, although they appear to have stabilized.

Margin Expansion

Kelly also pointed out that the initiatives for margin enhancement, implemented in 2012 and 2013 by Callaway’s new management, have also been impacted by FX headwinds.

The analyst believes, however, that over time, the company’s margins would grow to the peer/historical levels, “driven by changes in the product release cadence and golf ball business.”

Kelly also pointed out that Callaway has a 15 percent stake in Topgolf, valued at about $230-$240 million. “Aggressive expansion plans could drive further gains in investment,” Kelly added.