Description

Background: 

GOLF operates under four reportable segments:  Titleist golf balls (32% of sales), Titleist golf clubs (26%), Titleist golf gear (9%) and Footjoy golf wear (26%).  The Company generated its sales across the US (52%), Korea (15%), EMEA (14%), Japan (9%), and Rest of World (10%).  GOLF is most well known for its ProV1 golf ball.  The Company has nearly 50% market share of golf balls.

Investment Thesis / Variant Perception:

• Demand for Golf Products Unsustainable: 

o   Golf has had a resurgence due to COVID that will prove unsustainable.  With consumers looking for a socially-distanced and outdoor activity, golf has materially benefited.  Rounds played were up 13% in 2020 and were up an additional 8% YTD through September 2021.  Prior to COVID, rounds played had been declining as the sport had structural problems with participation principally driven by the time required to play.  By contrast, during COVID, people have been looking for activities to fill time.  On-course golf participation has been effectively flat for the past decade with participation growth only coming from off-course (ie, Top Golf) that doesn’t require golf clubs or balls.

o   There is a strong correlation between rounds played and spending on golf products.

o   Golf clubs (26% of GOLF’s sales) are durable, long-lived products at high price points.  It is possible that there is an air pocket in demand in 2H’22/2023 as demand got pulled forward into 2020/2021. 

• Headwind from Freight:  The supply chain for golf merchandise is completely messed up due to COVID with most production occurring in Asia.  Despite the strong demand and pricing power that golf manufacturers have currently with demand far in excess of supply, the sharp increase in freight costs is likely to negatively weigh on margins creating downside risk to profits despite the strong near-term topline results.

·         Headwind from Commodities:  The key raw material for golf balls is synthetic rubbers.  The key raw materials for golf clubs are steel, titanium, and aluminum.  GOLF is seeing inflation across its key commodities with the exception of titanium.

• Headwind from FX:  GOLF generated 15% of its sales in Korea, 14% in EMEA, and 9% in Japan.  Currency has been a tailwind to GOLF’s results from 2H’20 – 1H’21 that is now turning into a headwind as the USD has strengthened.

Risk/Reward:  My assumptions assume a 4.5% 2019-2023 sales CAGR largely consistent with pre-COVID trends with margins normalizing back to 14.5%.  In that scenario, I get EPS of $2.20.  GOLF historically traded at 13x-20x pre-COVID.  If I put 16x PE on my normalized earnings, I get ~25% downside.  If I am wrong and GOLF can continue to grow at 3% off the new higher sales base with margins remaining elevated at 15.4%, I get EPS of $2.75.  Putting a 20x PE multiple on that EPS, I get a $55 stock that would only be ~15% higher than today.  Asymmetry is compelling. 

Catalyst

Earnings