Golf company Callaway (ELY) was back in the news yesterday after declaring it will not end its endorsement deal with three-time Masters champion Phil Mickelson, amid an insider-trading scandal the golfer was peripherally involved in. Mickelson allegedly received a tip on Dean Foods (DF) days before the company announced the spinoff of WhiteWave Foods (WWAV). Former Dean Foods Chairman Thomas Davis and professional gambler William Walters, who is said to have given the tip to Mickelson, and to whom Mickelson owed a debt, were charged with insider trading. Mickelson, who made $931,000 on the trade, was not charged in the case, but agreed to pay back $1.03 million.
This type of news, while not positive for Callaway, is unlikely to have any lingering effects on the stock. As a long-time fan of the company, and former shareholder, I've been rooting for Callaway for years, waiting for the turnaround that has not yet materialized in a sustained manner.
There have been bright spots here and there for Callaway over the years. Most recently, first-quarter earnings came in better than expected ($0.40 vs. $0.38 consensus), and the company put up its best bottom-line in years. Still, the stock is not cheap, trading at 23x next year's consensus estimates (although that's an improvement from the last time I wrote about the name). Twenty years ago, in its growth heyday, that might have been a cheap valuation, but not now.
The last time I wrote about Callaway, there was negative feedback from readers who could not understand why I'd write a negative piece on a company they believed was turning the corner (shares are down 9% since). While I hope that this time it's for real, this is not the first time I've been to this rodeo. Several times over the past 10 years I believed the company was on the brink of a resurgence. There have been new products, new management, new affiliations with golfers and celebrities, along with the theory that golf was making a comeback, all of which have yet to pan out. Call me a bit jaded.
In a way, Callaway is the company that cried wolf, not solely through its own missteps, and many investors have either turned away, or are in "show me" mode. The headwinds continue: golf is not as popular as it once was, while the equipment side of the business remains very competitive. I hope this time the turnaround is real for Callaway, which retains the No. 1 market share in golf clubs, and No. 2 in golf balls. I just remain skeptical.
Ultimately, there may be money to be made here. The company does own some interesting assets, including real estate and a stake in TopGolf Entertainment. But the brand itself may have value to an acquirer. Great brand names continue to be gobbled up (such as Krispy Kreme (KKD)), and despite Callaway's lackluster performance over many years, it remains a household name, with a total enterprise value of just $900 million.
I would just need a bigger margin of safety in order to consider taking a new position -- such as a $6 share price.