Inside Wall Street: Tiger's Return Isn't All That's Lifting Callaway Golf


When Tiger Woods surprised the public on March 16 about his decision to start playing golf again, shares of several sports and media companies got a quick lift. One of them, not surprisingly, was Callaway Golf (ELY), a leading designer and producer of premium golf equipment, such as Big Bertha golf clubs, Odyssey putters and Top Flite golf balls. "Tiger Woods's return will certainly increase interest in the sport," and that's always a positive on a longer-term basis for the game and for makers of golf gear like Callaway, says Rommel T. Dionisio, analyst at investment firm Wedbush Morgan.

Callaway's stock jumped 1.5%, to $9.45 a share, on the news. Although seen by some as a short-term bump, the rise may be just the beginning of a further drive up, say some pros. Consolidation in the industry, for one, could be good for the stock, they argue. That, plus some improving fundamentals at the company should buoy the stock, these pros say.

In the past few weeks, a major deal appeared to support that premise. Fortune Brands (FO) sold part of its golf business -- the Cobra Golf brand-- to German sports company Puma. Among the golf equipment that Cobra Golf makes is a utility club, called the Baffler. Fortune Brands, which says it intends to keep playing an active role in the industry, retained its Titleist and FootJoy brands. As the flagship brand, Titleist generates a majority of Fortune's sales in the golf club category, according to the company. FootJoy is a leading brand in golf shoes and gloves.

Takeover Speculation

One industry analyst notes that the Fortune-Puma deal is significant because it's yet another indication that major soft-goods sports companies are still very interested in the golf business, which could ignite more deals. Callaway remains the only major independent golf-equipment company and may well be a takeover target, says an analyst who requested anonymity. Among the major companies in the business are Nike (NKE), Mizuno of Japan and Adidas, which owns Taylor Made, a major competitor of Callaway. Fortune Brands is a diversified consumer-goods company that markets such products as distilled spirits and wine, and home and security products,

"Naturally, when a transaction like the Fortune sale occurs, speculation about Callaway reemerges," says another analyst, who also preferred to be unnamed. He says the fact that Callaway President and CEO George Fellows is nearing 65 years old only adds to the intensity of speculation in the industry. About four years ago, Callaway received separate buyout bids from two major hedge funds, but its board turned down both offers. Some analysts put Callaway's value at $13 a share.

Analyst Hayley B. Wolff of Rochdale Securities in late February upgraded her recommendation on Callaway to a buy from hold "as the golf industry stabilizes and management continues to reduce its cost structure." Commenting on Woods's return to golf, Wolff says it has been a bigger factor for the TV networks and associated sponsors. But she adds that if Woods "posts an inspirational performance at the Masters Tournament, Tiger may get people out on the course and boost rounds played."

Part of an "Elite Group"

One of the positive fundamentals that analysts haven't taken into account is the value of Callaway's intellectual property (IP), or 1,200 patents, says Peter Conley, managing director of MDB Capital Group, which has conducted a study on the correlations between the strength of a company's IP and its revenue growth, gross margin and investment return.

Based on MDB's PatentVest research, Callaway belongs to an "elite group of 15 blue-chip companies, including Apple (AAPL), Cisco Systems (CSCO), Verizon (VZ), St. Jude Medical (STJ) and Boston Scientific (BSX), that are leaders in IP and innovation." In Callaway's case, Conley figures the stock is undervalued, based on MDB's proprietary PV Ratio, which values Callaway's IP at $12 to $14 a share. "The market thinks Callaway is overvalued because it has not factored in the value of its IP," says Conley.

Wedbush Morgan analyst Dionisio, who rates Callaway as outperform, says despite challenges like inclement weather and stiff competition for its newly launched products, "we still expect an overall rebound in 2010 fundamental performance." He says "clean retailer inventories, expected low-single-digit growth in retail sales for the golf industry in 2010 and expected operating margin expansion from greater fixed-cost absorption and lower promotional activity" should help enhance Callaway's results. He figures Callaway will earn 42 cents a share in 2010 on projected sales of $998.6 million. In 2009, Callaway posted a loss of 27 cents a share on sales of $950.8 million.

With Tiger Woods back on the fairway this week at the Masters Tournament in Augusta, Ga., public attention will surely turn to the game once again. Expect Callaway to catch a big part of that attention. For investors, it may be time to swing at its stock. .