The $505 million maker of Mack Daddy 2 wedges, golf balls and accessories trades at a lower sales multiple than 89 percent of similar-sized North American leisure- and sporting-goods producers, according to data compiled by Bloomberg. While the stock gained 32 percent in the past year as Chief Executive Officer Chip Brewer pursues a turnaround, Callaway may attract buyers while it’s still languishing at a lower valuation, according to Adirondack Research & Management Inc.
The Callaway brand and the Carlsbad, California-based company’s foothold in golf equipment could lure Nike Inc. (NKE), said Grace & White Inc., which also sees Kering SA, owner of the Cobra brand, as a potential buyer. Private-equity firms also may be drawn by the chance to carry out Brewer’s turnaround plan on their own, said Gilford Securities Inc.
In golf, Callaway is “the biggest, best-known brand name out there available for an acquirer,” Casey Alexander, New York-based director of equity research and a special-situations analyst at Gilford, said in a phone interview. Even after the rally, it “can still be considered quite a bargain today.”
A representative for Callaway said the company had no comment.
Callaway traces its roots back three decades to when founder Ely Callaway delivered clubs personally from the trunk of his Cadillac car, and now counts top golfers including Mickelson and Ernie Els as well as all-time greats Arnold Palmer and Annika Sorenstam as endorsers, according to its website.
The club maker last had an annual profit in 2008. Since then, it accumulated losses as consumers curtailed discretionary spending amid an economic slump and competition from rivals such as Adidas AG’s TaylorMade brand.
“First and foremost, you’ve had a stagnant golf market,” Marc Ravitz, executive vice president of New York-based Grace & White, which oversees more than $800 million including Callaway shares, said in a phone interview. “They made huge missteps in marketing and addressing their larger competitors. They’re starting to regain the market share that they lost over the last few years.”
While Brewer, who took control in March 2012, is seeking to restore profitability by reducing costs, streamlining operations and building market share, Callaway last week said it will post an annual adjusted loss of as much as 12 cents a share, which would be wider than projected by analysts.
The company also cut its 2013 revenue forecast for the second time to $810 million to $820 million, its lowest annual sales in a decade and down from its $850 million projection in January.
Callaway trades at 0.62 times its projected revenue this year, a lower multiple than all but two North American leisure products and sporting-goods manufacturing companies valued at more than $100 million, according to data compiled by Bloomberg.
Potential acquirers have an opportunity to obtain a well-known brand at a discount before results improve under Brewer’s plan, according to Matt Reiner, a fund manager at Guilderland, New York-based Adirondack Research.
“Callaway might be an interesting target for one of the large sporting-goods conglomerates,” Reiner, whose firm oversees about $150 million, including shares of Callaway, said in a phone interview. “It’s one of the most popular brand names in golf. It’s probably a good time to look at them because the turnaround hasn’t been completed yet.”
Today, Callaway shares climbed 1.7 percent to $7.22 at 10:13 a.m. New York time, rising for the first time in six days.
Nike, the world’s largest sporting-goods company, is a logical suitor for Callaway, said Ravitz of Grace & White
“Callaway is a very valuable brand name,” Ravitz said. While Nike’s golf apparel line has been successful, “I really don’t think they’ve acquired a lot of market share in the club business and purchasing Callaway would be a perfect fit.”
Kering, (KER) the luxury goods conglomerate formerly known as PPR SA that owns a controlling stake in Puma SE (PUM), also could be lured to Callaway and the chance to supplement its Cobra products and Puma golf attire line, Ravitz said.
Beth Gast, a spokeswoman for Beaverton, Oregon-based Nike’s golf division, and Helene Saint-Raymond, a spokeswoman for Paris-based Kering, declined to comment on whether their companies would be interested in acquiring Callaway.
Kering CEO Francois-Henri Pinault said in February that the company’s priority in sports and lifestyle will be Puma’s turnaround, with the company last week reporting steeper declines in quarterly earnings than analysts had estimated.
“Once we’ve achieved that, we will resume acquisitions,” Pinault said.
Callaway could even be an attractive target for private-equity firms, which may be drawn by the company’s brand and the potential profit tied to completing the turnaround strategy on their own, said Alexander of Gilford Securities.
“A private-equity firm would certainly be happy to get what might appear to be an advantageous price today that would allow them an exit a few years down the road as the company is further into this turnaround at a significantly increased price,” he said.
Shareholders may prefer that the company wait to sell itself until after it has returned to profitability and can command a higher price, according to James Gibson, an analyst at Punch & Associates Investment Management Inc.
“They’re really in the early innings of the turnaround,” Gibson, whose Edina, Minnesota-based firm oversees about $630 million, including Callaway shares, said in a phone interview. “We would much rather see them just continue on this strategy for the next few years before any takeout. The company will continue to be more valuable as Chip continues to make progress.”
While Callaway would likely fetch a higher premium after Brewer’s turnaround is completed, it could lure offers of as much as $13 a share today, an 83 percent premium, said Reiner of Adirondack.
“That would be a fair number where we stand today,” he said. “I’d like to see what he could do with this over the next couple of years, but it always comes down to, ‘If the right offer came, you have to consider it.’ You could see it be an interesting fit for a larger player.”
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