|Shares Out. (in M):||8||P/E||7.6x||4.5x|
|Market Cap (in $M):||40||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||0||EBIT||6||0|
Adams Golf (NASDAQ:ADGF) is a microcap golf equipment manufacturer trading at a discount to net current asset value despite strong profitability, growing revenues and market share, additional value from deferred tax assets not recognized on the balance sheet, and the potential for significant positive operating leverage going forward from the recent acquisition of a bankrupt competitor at favorable prices.
Earnings valuation and outlook
Adams designs, manufactures and distributes mid to high end golf clubs under a variety of company-owned brands including Idea Pro, Speedline, Insight, Lady Fairway, Women's Golf Unlimited, and Square 2. At just over half 2008 levels of $10, ADGF shares are available at attractive multiples to trailing and historical earnings. Beginning to recover from a sharp dropoff in consumer spending during the financial crisis, ADGF generated $0.70 per share in fully diluted ttm earnings for a P/E ratio of 7.86. Valuations to recent historical earnings are even more attractive; before the FY2008-9 downturn (which included significant one-time charges from final settlement of a 2000 class action suit), ADGF earned $1.24 and $1.32 per share in each of the 2006 and 2007 fiscal years - taking the lower of these numbers, the current multiple to historical earnings is just 4.2.
Although the stock sold off recently on a difficult comparison against year-ago earnings of $0.63 in a single quarter, an increase in marketing and R&D spending relating to launch of several new product lines in the current quarter has masked continued 15-20% growth in revenue and market share across multiple categories. Earnings also continue to be impacted by costs of a lawsuit filed by Adams against its former liability insurance broker. In June, the Circuit Court of Cook County IL granted a preliminary motion that could result in a net recovery to Adams of at least $3.75 million plus attorney's fees if allowed to stand, in addition to eliminating legal expense going forward. Simply continuing recent earnings performance should create generous returns for ADGF shareholders, while a return to anywhere near past levels of profitability could generate greater than +100% upside from current levels.
Recent opportunistic acquisition
Management appears to have a disciplined track record of capital allocation, and Adams has not been a serial acquirer. However, ADGF recently closed on a small but significant opportunistic acquisition, buying the assets of former competitor Yes! Golf at a bankruptcy auction where the company was the only bidder. Although possessing a strong brand identity for its core putter products, the firm had struggled after an aggressive and poorly timed expansion heading into the credit crisis, and working capital problems stemming from high leverage exacerbated a precipitous decline in sales. The purchase price of $1.65 million already represents a reasonable multiple to the firm's end-stage $2.4 million of sales when under extreme distress in 2010, but appears exceptionally attractive when compared to 2007 revenues of more than $10.2 million. The acquisition included significant inventory which is currently being rolled out using ADGF's existing sales channels. If Adams can leverage its existing sales, marketing and distribution infrastructure to improve margins and drive an increase in sales regaining even a fraction of prior levels, this acquisition could contribute to significant further earnings growth over the coming years, potentially leading to multiple expansion as the firm's growth becomes better recognized.
ADGF trades at 0.7 times tangible book value of $7.11 per share. Before considering tax assets, PPE, and intangible value of brands and technology, Adams' $42 million in current assets net of all liabilities exceed the $40 million market cap. Adams also had $19.75 million in deferred tax assets as of the last 10-K, $9.5 million of which are not represented in reported book value under a valuation allowance. If recent profitability continues, recognition of deferred tax assets would bring adjusted tangible book value to more than $8 per share.
Intangibles and private market value
Adams has been experiencing continuing gains in market share that appear to be stimulated in part by perceived leadership in technological and design innovation, creating an increasingly positive brand identity that has enabled a 15.8% ROE and could lead to further improvements in market share and net margins. In January 2011, Adams products received seven awards in Golf Digest's latest annual equipment issue, and Adams' Idea Tech V3 irons were selected as one of four products to receive the Editor's Choice award. During late 2010 the company gained valuable publicity from multiple internationally televised events, with two golf pros taking home several major championships using company clubs: Bernhard Langer winning both the U.S. Senior Open and Senior British Open, and Yani Tseng winning the Women's British and Australian Opens.
Already trading at a discount to tangible book value, ADGF appears to have significant intangible brand and intellectual property assets that could have substantial additional value to an acquirer. Adams owns 51 U.S. patents regarding various golf equipment technologies, and has a further 13 patent applications pending. The firm has invested over $16 million in research and development since 2004, and its returns on equity support the existence of intangible brand and patent asset value not present in GAAP shareholders' equity. As a microcap public company, Adams could achieve very substantial per-share savings in marketing, administrative, and Sarbox compliance costs if acquired by a strategic buyer, rasing its value to such a firm significantly. Acushnet Golf (owner of the Titleist and FootJoy brands) was recently sold for approximately 1X 2010 revenues, which would equate to $12.75 per share for ADGF. Although there has been no public discussion of a potential sale, management and Board members own 46% of the common stock, nicely aligning them with shareholder interests should an attractive offer be received.
ADGF appears to be a profitable and growing business trading at a discount to tangible book value and net current assets and low valuations to current and historical earnings, with further potential upside from operating leverage relating to its recent opportunistic acquisition at bankruptcy auction. Although the float is limited, microcap value investors should enjoy strong risk-adjusted returns and a generous margin of safety.
|Subject||2006 and 2007 EPS?|
|Entry||08/24/2011 05:00 PM|
I noticed you referenced EPS for 2006 and 2007 to frame the potential upside, but was EPS in those years inflated by large negative tax rates?
Glancing at the 2006 income statement, it looks like revenue was $76.0 million, operating profit was $3.4 million (margin of 4.5%), pretax income was $3.7 million, provision for income taxes was positive $5.3 million, and net income was $9.0 million, resulting in EPS of $1.24. But if you remove the positive impact of taxes (and assume no taxes), then EPS would be $0.51. If I do the same exercise for 2007 (ie, calculate EPS assuming no taxes), then EPS would have been $0.65. Do you know why book taxes had such a large positive impact on earnings in those years? And is that effect likely to resurface?
Regardless, this does look pretty cheap, thanks for posting. The concern I'm wrestling with on ADGF is whether there is something analogous to fashion risk for the company. I know they had a big hit in the late '90s with the Tight Lies fairway wood product (I owned a Tight Lies fairway wood at the time, it was a very good design), but then others copied the design and they suffered several mediocre years thereafter. They seem to be doing very well on the design front recently - I'm just trying to gauge how sustainable that is. Any thoughts on that?
Thanks again for the idea.
|Subject||RE: 2006 and 2007 EPS?|
|Entry||08/24/2011 11:28 PM|
That's a good point; EPS for those years was boosted by a partial release of the valuation reserve against deferred tax assets, although there remain about $9.7 million in fully reserved tax assets to be recognized in future so this could recur, it is too aggressive to fully capitalize that as core earnings. Trailing results do not include NOL valuation reserve benefits and are still attractive.
As with most brands there can always be some competition from copycat products, but their patent portfolio may ameliorate that somewhat. I don't think they have some sort of unassailable moat, but its a reasonably good business to buy at a discount to tangible book.
|Subject||Why I passed on ADGF|
|Entry||08/25/2011 04:34 PM|
I took a (rather quick) look at this, and here's where I disagree... ADGF has really no 'excess' cash due to the company's working cap needs (just look at the Q1 b/s). The market cap is 45mm and PV of the NOLs is about $5mm, so maybe the EV is ≈40mm. LTM EBIT is about 5.5mm, so at today's price you're paying <7x.
Now, you could argue that this is cheap since LTM consumer spending is below 'normal' levels. However, golf appears to be a slowly declining sport in the US (where ADGF gets most of their revenue). There is also a fair degree of variability in market share for golf equpt from yr to yr. as new models are introduced and I was unable to determine if ADGF could maintain / grow share. As such, it was not obvious to me that current earnings are depressed.
Just my thoughts
|Entry||09/27/2011 03:32 PM|
Enjoyed your write-up. Would you provide an update? Do you have any thoughts on the recent price action? Thanks.
|Subject||ADGF up for sale|
|Entry||01/09/2012 12:31 PM|
Adams has retained Morgan Stanley to "explore strategic alternatives", and after the recent uptick is still trading only slightly over net current assets.
As mentioned in the writeup, if using the recent Acushnet buyout as a comp a multiple of 1X revenues would come to around $12.68 per share. Due to ADGF's small size, the potential savings to an industry acquirer from reduced SG&A and public company costs could be very significant relative to today's market cap.
|Subject||RE: ADGF up for sale|
|Entry||01/09/2012 12:50 PM|
The write-up has been successful, but I think the Acushnet revenue comp is meaningless. Acushnet has stronger brands and has by far the top ball brand. Adams had some traction with "utility woods and irons" but it has no moat and every other manufacturer copied and improved upon their designs. As you probably know, the golf industry is in a secular (a lot of people realized that taking 6 hours out of your day to play a frustrating game is no fun) and cyclical decline.
I would be surprised if someone paid 1x revenue or even more than a slight premium to TBV for this company.
|Subject||RE: RE: ADGF up for sale|
|Entry||01/09/2012 10:40 PM|
Six hours to play a round of golf? You should consider capping your strokes at ten per hole :)
Acushnet is definitely not a perfect comp. It is much bigger, more mature, and was purchased to be run as a stand-alone. That said, I do not see why it would escape your rather gloomy conclusions regarding secular and cyclical decline, yet the Koreans paid a rather full stand-alone mulitple. As in other industries, there is secular international growth that should be considered against any secular pressure in the mature markets.
The Adams brand is stronger than you credit. On the professional tours, Adams is the #1 utility wood. In the retail sales channel, they have been taking share from Callaway and others in the niche "easy to hit" category that is very popular with women, seniors, and high handicappers. The share data demonstrate that Adams deserves to be mentioned along with TaylorMade and Titleist when speaking of recent success.
What differentiates Adams from Acushnet is its potential as an accretive tuck-in acquisition. Consider that, on an LTM basis, Adams generated 43mm of gross profits. Stand-alone R&D is about 3mm and a larger organization would have minimal expenses beyond selling and advertising. Gross margin would probably expand due to purchasing power, and pro-form EBIT would be 2-3x higher than stand-alone.
In addition, there are revenue synergies to consider. Adams does 5-10% of sales ex-NA compared to 30-50% for larger competitors. While Adams' ex-NA sales are small, they are growing rapidly, indicating that the brand has legs overseas and just needs the distribution.
For Adidas/Taylormade, Acushnet, Callaway, etc., the only other independent potential tuck-in that is as big or bigger than Adams is Ping, which is family-owned and probably not for sale. Against this backdrop, I do not understand how one could rule out a strategic takeout at a valuation in excess of 1x revenues.
|Subject||RE: RE: RE: ADGF up for sale|
|Entry||01/10/2012 06:16 PM|
First, it's the guy in front of me that needs to pick up after ten shots, not me!!
Second, if I have a consistent blind spot (and I would argue a lot of value investors do), it is valuing companies based on possibility of strategic acquisitions. First, there is the chance that acquirer simply paying too much. Second, difficult to know the operational details to assess "synergies" and such. And third, difficult to know if there is interest. I would not have valued Inhibitex at 2.5x its price last week. Thank heavens I was not short it. It may get bought at more than 1x revenue but not because it was being valued based on revenue LTM but instead due to these pro forma numbers you are implying after being acquired.
I still think the Acushnet revenue comp is worth very little because brand quality and more importantly, product mix with very different margins and moats. It is searching for a comp where none is available.
|Entry||03/19/2012 02:40 PM|
PLANO, Texas, March 19, 2012 (GLOBE NEWSWIRE) -- Theadidas Group and Adams Golf, Inc. (Nasdaq:ADGF - News) today announced that the TaylorMade-adidas Golf business segment has entered into a definitive agreement to acquire all of the outstanding shares of Adams Golf for $10.80 per share in cash. The transaction value is approximately $70 million (approximately EURO 53 million), which represents a premium of approximately 71% to the share price prior to Adams Golf's announcement that it was examining strategic alternatives on January 4, 2012.
Through the acquisition of Adams Golf, TaylorMade-adidas Golf reinforces its position as the world's number one player in golf. The addition of Adams Golf enables TaylorMade-adidas Golf to broaden its product range and to extend its presence across a wider array of golfers.
"This acquisition reflects our commitment to continued growth in the golf category," said adidas Group CEO Herbert Hainer. "The proposed combination of Adams Golf and TaylorMade-adidas Golf brings together two highly complementary sets of brands, combining Adams' focus on game-improvement as well as senior and women golfers with TaylorMade-adidas Golf's focus on the younger and the low-to-mid handicap golfer."
"We are very excited to team up with Adams Golf, whose management team we have respected for many years," commented Mark King, President and CEO of TaylorMade-adidas Golf. "Our mission is to be the best golf company in the world across all geographies, products and customer demographics, and adding Adams Golf is another important step in achieving that goal."
"This merger provides strong opportunities for our employees, suppliers and partners," said Barney Adams, Interim CEO of Adams Golf. "The Adams Golf brand will fit nicely into TaylorMade-adidas Golf's stable of brands, and together we will be able to increase our reach and better serve our customers by leveraging a wider set of resources. We are also excited that TaylorMade-adidas Golf has decided to maintain Adams Golf's headquarters in Plano, Texas."
The Board of Directors of Adams Golf has unanimously approved the transaction. Certain insiders, who include John M. Gregory, Joseph R. Gregory, SJ Strategic Investments LLC, B.H. (Barney) Adams, Russell L. Fleischer, Mark R. Mulvoy and Robert D. Rogers, collectively own approximately 35% of Adams Golf's outstanding shares and have agreed to vote their shares in favor of the transaction. The adidas Group plans to finance the acquisition with cash on hand or through existing credit lines. The transaction is subject to customary closing conditions and regulatory approvals as well as approval by Adams Golf shareholders. The transaction is expected to close mid-2012.
In connection with the transaction, Barclays is acting as financial advisor to the adidas Group, and Sheppard Mullin Richter & Hampton LLP is serving as legal counsel. Morgan Stanley is acting as financial advisor to Adams Golf and Haynes & Boone, LLP is serving as legal counsel.
About Adams Golf
Adams Golf designs, assembles, markets and distributes premium quality, technologically innovative golf clubs for all skill levels. Recently launched products include the Speedline Fast 12 drivers, Fast 12 LS drivers and the Speedline Fast 12 fairway woods, along with the Idea a12 OS irons and hybrids, Idea a12 hybrids, Idea Pro a12 irons and hybrids, Idea Tech V3 irons and hybrids, Redline irons, Idea a7 and a7 OS irons and hybrids, and Speedline 9088 UL drivers. Adams Golf also develops new products under the Yes! Putters, Women's Golf Unlimited, Lady Fairway and Square 2 brands. In 2011, net sales were approximately $97 million (EURO 73 million).