Can Callaway Finally Follow Through?

 | Jan 20, 2012 | 10:00 AM EST  | Comments
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Hope springs eternal when we start to see the broader markets heading higher. This often helps propel the smaller, more-challenged names as well.

It's the rising tide lifts all boats effect, no matter how ugly and how damaged some of these boats appear to be. 

It does not get much uglier than Callaway Golf (ELY), at least in terms of a painfully slow recovery. The premium golf club maker has transformed itself, not by choice, from a pioneer growth darling in the 1990s to a value play the past few years. "Value trap" might be the preferred description of some investors, as the company's efforts to right the ship and regain some momentum have been very slow and very frustrating. A difficult economy has not helped matters as consumers have shunned bigger-ticket discretionary purchases, but the company has not executed very well either.

Revenue, which topped out at a little more than $1.12 billion in 2007, was $968 million last year and the company lost $29.3 million, or $0.46 per share.  It was a disappointing year and fiscal 2011 has not been any better. Last quarter, revenue fell 1.4% to $173 million and Callaway lost $65.2 million, or $1.01 per share. Based on year-to-date revenue of $733 million, and fourth quarter consensus estimates of $153.5 million, total revenue for 2011 will not even break $900 million. The analyst community is expecting a rebound in 2012, with consensus estimates of $954 million in revenue and earnings per share of $0.19. Callaway has not had a profitable year since 2008 and the company's recovery has been continually pushed farther into the future, so I'll believe it when I see it.

That said, the stock is telling us a slightly different story, one of hope as shares are up more than 20% since late November, and 10% year to date.  It's no doubt mainly due to the rising tide of the markets.  But I wonder whether the company is actually also getting its act together through management changes, more cost cutting measures and new product introductions, bolstered by the early promise of an improving economy? Perhaps it's still too early to tell.  We may know more next Wednesday when the company announces fourth-quarter results.

If nothing else, the balance sheet remains fairly clean. Callaway ended the third quarter with $64.3 million, or $1 per share in cash and no debt. The company is currently trading at just 1.5x net current asset value and 0.94x tangible book value. That is compelling to me as a value investor, but without a recovery in revenue and bottom line it is not as meaningful, unless of course someone finally acquires the company based in part on the valuation.

It will also be important for the company's 2012 product line to be well received.  Callaway received accolades in Golf Digest's 2012 Hot List, including editor's choice for its new RAZR Fit Driver. In fact, Callaway products earned more gold and silver medals than any other manufacturer.  We'll see if these products resonate with golfers.

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