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Analysts Look Past Callaway Golf Guidance To Celebrate Healthy Fundamentals

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Analysts Look Past Callaway Golf Guidance To Celebrate Healthy Fundamentals

Callaway Golf Co (NYSE: ELY) shares plunged as much as 9.4% Tuesday as the Street zoned on the negative half of mixed fourth-quarter earnings.

The Bad

Callaway’s 26-cent loss per share missed estimates by two cents. Stephens attributed the underperformance to a higher interest expense, increases in depreciation and amortization, and lower gross profit.

Adjusted earnings before interest, tax, appreciation and amortization came in at a loss of $5.5 million compared to estimates for a loss of $2.4 million. Guidance also fell short of expectations, with sales between $1.75 billion and $1.78 billion.

“It’s important to emphasize, however, that this outlook largely reflects a number of ‘macrofactors,’ most notably the coronavirus as well as FX and tariffs, which are obscuring generally healthy industry fundamentals and very strong underlying momentum for ELY behind the success of new product launches,” Raymond James analyst Joseph Altobello wrote in a report.

Both he and Stephens analyst Daniel Imbro dismissed concerns over Callaway’s projections.

“We believe the company's guidance still calls for ~300-400 bps of outperformance to industry growth, ELY should be supported by a robust product lineup, and the industry continues to improve (better participation, rounds played, and industry spending),” Imbro wrote. “Additionally, recent success on Tour (and free agents choosing to play the clubs) is a validation that likely bodes well for retail sales over the coming quarters.”

See Also: Callaway Analyst: Topgolf Worth More Than Previously Thought

The Good

The underwhelming guidance and bottom line were offset by growth in other metrics. Operating income grew 60%, and gross margins expanded 370 basis points. Sales of $311.9 million beat forecasts by 2.2% and last year’s comparable period by 72.6%. Revenue reflected growth across all regions and categories, including clubs (36%), balls (26%), apparel (266%), and gear and accessories (52%).

“We believe these strong results, along with continued rounds played momentum, will position inventories nicely for the 1Q launches of the Mavrik line, the two new Stroke Lab Putters (utilizing Triple Track technology) as well as the new Chrome Soft and Chrome Soft X later in the quarter,” Imbro wrote.

Imbro expects improvement in golf ball profitability this year given the ramp at Callaway’s Chicopee plant and boosts to average selling prices on the Chrome Soft. He also expects growth contributions from the international expansion of the softlines business.

The Ratings

Altobello maintained an Outperform rating on the stock but cut his price target from $24 to $22. Imbro maintained an Overweight rating with a $25 target.

“While the company’s expansion in soft goods entails a fair amount of execution risk, we believe the stock is not fully reflecting ELY’s healthy core nor its 14% stake in Topgolf,” Altobello wrote.

Callaway Golf's stock traded around $19.06 per share at time of publication.

Latest Ratings for ELY

DateFirmActionFromTo
Jun 2020SunTrust Robinson HumphreyMaintainsBuy
Jun 2020Raymond JamesMaintainsOutperform
May 2020Compass PointMaintainsBuy

View More Analyst Ratings for ELY
View the Latest Analyst Ratings

 

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