July 17, 2014 - 5:22pm EST by
2014 2015
Price: 8.22 EPS $0.00 $0.00
Shares Out. (in M): 94 P/E 0.0x 0.0x
Market Cap (in $M): 771 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT 0.0x 0.0x

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  • Golf
  • Manufacturer
  • Retail
  • Turnaround
  • NOLs
  • Hidden Assets


Long: Callaway Golf Co. (NYSE: ELY)

Current Price: $8.22

Fair Value: $11.55

Return: 41%

Market Cap: $771MM



Callaway Golf is in the midst of a turnaround led by seasoned executive Chip Brewer, who previously tuned around Adams Golf before selling it to TaylorMade-Adidas in 2012. In turning around ELY, Chip is using the same playbook he used at Adams Golf. Therefore, it would not be surprising if he follows through with a sale of ELY as well. In addition to the strengthening golf business, ELY has hidden assets in the forms of a high-teens percentage stake in a concept called TopGolf and significant NOLs—both of which have clear paths to monetization.


Company Overview


ELY designs, manufactures, and sells golf clubs, balls, and accessories in over 100 countries. For 2013, 63, 21, and 16% of sales came from clubs, accessories & other, and golf balls, respectively. For the same year, 48, 19, 14, 10, and 9% of sales came from the US, Japan, Europe, rest of Asia, and other, respectively. The golf industry exhibits significant seasonality, which results in the majority of sales occurring in the first half of the year.



The golf equipment industry has been in the doldrums for the several years and continues to remain challenged. In the US, 462MM rounds of golf were played in 2013—the lowest since 1995. Furthermore, 2013 was the eighth straight year of net golf course closures in the US. A Google Trends search for “golf” clearly shows the waning interest over the last decade. The most frequently cited reasons for the decline in golf participation are time and money—both of which are tied to the economic climate, which has been less than stellar for quite some time. There is no structural reason that golf is on its way to extinction, so long-term growth should hover in the LSD supported by population growth and inflation. This growth may be assisted by retiring baby boomers as senior citizens play more golf than their younger counterparts. Additionally, there are many interested parties that are now taking action to arrest the decline in participation. These efforts may prove fruitful in bringing golf growth back to the LSD. It is also important to remember that ELY derives ~50% of its sales internationally where the growth in golf participation may be higher than in the US.



Chip Brewer, who was hired by ELY in March 2012 after he sold Adams Golf to TaylorMade-Adidas, helped turn Adams Golf around and significantly increase the stock price. Chip was hired by Adams as SVP of Sales and Marketing in September 1998 and eventually became CEO in January 2002. When Chip was promoted to CEO, Adams’s stock price was under $2.00 and the company was losing money. By the time he sold the company to TaylorMade-Adidas in March 2012, the stock price was above $10.00, the company was profitable, and revenue had over doubled since Chip’s promotion. Equally as important, Chip increased the golf club brand rating (per Golf Datatech) from last place (out of 10 brands) to sixth by the time he sold the company. Making these accomplishments especially impressive is that fact that they were achieved while the golf equipment industry was struggling.

How did Brewer effect such a drastic turnaround at Adams? Firstly, he invested heavily in R&D. He doubled R&D spend in 3 years and tripled it in 6 years. He also increased investment in tour players (that is the signing of professional golfers to use and promote a certain brand). At the same time, he was conscious of the cost structure and reduced operating expenses in 2002 to a level that wasn’t seen again in nominal terms until 2006.

The above strategies are the same ones Brewer is using to reverse the decline in market share at ELY that was the result of missteps by prior management. Below are some quotes from industry professionals I have spoken with (and one from a news article) that describe the strategy Brewer is currently using to increase market share.

  • “He’s invested more in R&D and been the spark for innovation—and it has shown in their products.” – Industry professional
  • “Callaway and TaylorMade have the best equipment… Callaway might be marginally better now.” – Industry professional
  • “Callaway has almost become a media company in the last year. They have done a great job with marketing and are more engaging with their customers than other brands… No one else is doing the things they are doing… They are very close with their tour players and have recently signed a handful of younger players.” – Industry professional
  • “Timms [CEO of Cool Clubs] says he didn’t even know Callaway’s previous regional sales manager, but has received three visits from the company’s new regional rep, talks with him regularly and finds him ‘very involved and very helpful.’” – News article

Brewer’s strategies have worked fabulously as US hardgoods (clubs and balls) market share has increased from 13.9% in 2012 to 15.1% in 2013 and 19.3% in Q1’14. The Q1’14 number is artificially high because TaylorMade (the leader in the industry) didn’t introduce a new product in the quarter. In April and May, ELY’s market share was 17.9 and 18.1%, respectively (this data is released monthly by Golf Datatech). I believe that in time, ELY’s US market share can reach or surpass the 19.6% achieved in 2007.

Another reason for the increase in market share at ELY may be Brewer’s effect on morale. Below are some more quotes from industry professionals I have spoken with (and one from a news article) that describe how Brewer has affected the workplace.

  • “He is a really nice guy, very well connected within the golf industry, and very knowledgeable… Chip was well liked and people trusted his decisions.” – Former employee
  • “He is a hit among the guys there.” – Industry professional
  • “It is cool to see how office morale has changed.” – Industry professional
  •  “I really noticed a big difference in all of the people there, that they were pretty excited about having Chip there and having somebody in the golf business running it.” – Timms, CEO of Cool Clubs

Besides increasing market share and sales, Brewer also introduced tremendous improvements to the cost structure, operations, and the supply chain. In 2012, OpEx as a % of sales was 42.3%. In 2013, it was 38.1%. For the same years, gross margin increased from 34.2% to 38.7%. Some of the results of the improvements to the cost structure, operations, and the supply chain are listed below.

  • Increased club assembly and golf ball manufacturing productivity
  • More focus on core brands and operations
  • Ability to more quickly change supply in reaction to demand
  • Increased abilities of suppliers to meet ELY’s product specifications
  • Lower warranty claims
  • Faster repair turnaround

Lastly, Brewer is well incentivized to continue running ELY well as he has exposure to over 1.8MM shares (~2.0% of the company).


Hidden Assets



TopGolf is a driving range game meets sports bar concept. The golf balls have embedded RFID chips which allow the balls to be precisely tracked. There are different games a group can play, and points are awarded based on distance and accuracy to different targets in the field. Each bay seats up to six people, and food and beverages are served by the “bay hosts”. There is also a dedicated bar and eating space along with room for corporate events. TopGolf draws a wide demographic with half of its customers describing themselves as non-golfers.

There are currently 13 locations (3 of which are in the UK, which is where the idea was invented) with 9 more under construction. As of late 2013, revenues have increased every year at every US facility. Callaway is one of four major investors and has preferred signage rights, rights as preferred supplier of golf products used or offered at TopGolf locations, and preferred retail positioning in TopGolf retail stores.

Below is my TopGolf valuation:

TopGolf 2015 Exit Numbers ($MM)

Locations (not in $MM)




Four wall margin






EBITDA margin




EV/EBITDA multiple




Net debt


Equity value


ELY's stake


Illiquidity discount


Value of TG to ELY


ELY's cost basis


After-tax value of TG to ELY


Per share


I will touch on a few of the line items here:


  • The website currently lists 22 operating or in-development locations not including the Las Vegas location for which there was a job posting that mentioned a larger facility that would do $50MM in sales and be open by the summer of 2015. A recent article mentioned TopGolf expects to open 6 more units by YE 2014 and 10-12 per year thereafter. With 13 units currently open, that results in 29-31 units by YE 2015. This was confirmed by a contact I spoke with who knows TopGolf management.


  • I have derived this number using a blend of the 6 smaller legacy units, 1 Las Vegas unit, and 22 new units. I use an AUV of $21MM for the new units. This is derived from the revenue/visitor which I found in a presentation TopGolf gave to the city of El Segundo in their efforts to persuade the city to permit a unit there. I then use the revenue/visitor number and multiply it by the 450K visitors expected at the new units as discussed in press releases announcing new openings. This AUV has been confirmed by a contact I have spoken with and an investor at the analyst day who announced an AUV of $20MM during the Q&A.

Four wall margin

  • I have derived this number using a blend of the 6 smaller legacy units and 19 new units. I use a four wall margin of 40% for the new units as this is what I have heard and is what the investor at the analyst day announced during the Q&A.

EV/EBITDA multiple

  • The high valuation is supported by valuations of other early stage companies that offer new, unique concepts, rapid growth, significant runway to expand, and very high ROICs and margins. The 15x multiple may even be conservative as I can easily see a higher multiple in an IPO.

ELY’s stake

  • Management will only say that their stake is less than 20%. I have heard that at one point it was 17% but is likely higher now because other investors couldn’t keep up with capital calls. The investor at the analyst day announced 19% during the Q&A.

Yelp reviews are widely positive with one complaint being wait times and parking issues because TopGolf is so busy. One location in Houston does more beer sales than any other site in the city except for the football stadium. Overall, it is clear from quantitative and qualitative factors that TopGolf prints money and is extremely valuable.



Because of the losses ELY suffered before Chip was installed in 2012, ELY has booked significant US state and federal NOLs. Now that ELY will finally be profitable in 2014, it will be able to use these NOLs to offset income taxes. Valuing the $253MM in US federal NOLs with a DCF results in a PV benefit of $63MM or $0.67/share to ELY.



When valuing the golf business, I assume a return to market share levels seen in 2007 and significant operating leverage as management has stated that over 90% of operating expenses are fixed. I arrive at $100.1MM in EBITDA in 2016 and apply a forward multiple of 8.7x (average of BC, COLM, NLS, and PII) and discount the EV back 1 year to the present day. I average that valuation with a forward P/E of 17.7x (again an average of comps) on 2016 EPS of $0.50/share (fully taxed) discounted back a year. I use 2016 numbers as the golf business is at an inflection point and by 2016 earnings will be much more stable.


Value per share

Golf business


TopGolf stake


PV of NOLs




The sum of the parts results in a valuation of $11.55 or 41% higher than the current price.


Variant View

  • TopGolf has significant value and is underappreciated by the market
    • TopGolf is held on the balance sheet at cost, which is ~10% of its true value
    • TopGolf is private and therefore limited knowledge of its financials
  • The NOLs offer significant value and are underappreciated by the market
    • ELY has not made money for several years so the NOLs have not been reflected on the income statement
    • A reduced future tax burden is now likely given the company’s tremendously improved financials
  • Because ELY is the only pure play in the industry, shorts (ELY has 13% short interest) may be using it as a way to bet against the struggling golf equipment industry
    • This would be a simplistic bet that ignores TopGolf and Chip’s abilities



  • TopGolf IPO or monetization
    • I have heard that TopGolf management will likely pursue an IPO in the next few years
    • ELY amended its ABL facility on 6/23/14 and new language was added that allows ELY to put any proceeds from TopGolf in a reserve for share repurchases and dividends
  • Sale of the golf business
    • After turning around Adams Golf, Chip Brewer sold the company to TaylorMade-Adidas
    • I have heard that Chip was a key player in the sale of Adams
  • Use of the NOLs
    • As ELY starts making money, the benefit of the NOLs will be clearly seen
  • Continued evidence of a successful turnaround from increased market share



  • Short-term pressure from promotional environment due to bloated industry inventory
    • Recent poor golf equipment sales at Dick’s Sporting Goods may be more isolated to Dick’s due to their disproportionate share of TaylorMade clubs, which were down 34% in Q1’14, and their disproportionate mix of locations in states hit with the worst of the winter weather
    • ELY also has ~50% international exposure
  • Continued decline in golf participation
  • Fierce competition
  • Short product life cycles which means the company has to keep innovating to stay competitive
    • 50% of golf clubs purchased are introduced in that year

The downside risk comes largely from lack of sales growth in the golf business as a result of industry contraction or the inability to gain market share. This would allow the operating leverage to cut the wrong way and result in a lower value of the NOLs which could result in a stock price of $7.03 (15% downside) if the turnaround stagnates (no further increase in market share and 1 turn of multiple contraction). This is supported by a return to a stock price slightly higher than before Chip Brewer was hired as CEO.



ELY is currently undervalued on a sum of the parts basis allowing an investor to get the extremely exciting and fast growing TopGolf stake for free. There is additional upside in the event of a sale of the golf business, which is very possible given Chip was highly involved in the sale of Adams after he turned that business around.

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.


  • TopGolf IPO or monetization
    • I have heard that TopGolf management will likely pursue an IPO in the next few years
    • ELY amended its ABL facility on 6/23/14 and new language was added that allows ELY to put any proceeds from TopGolf in a reserve for share repurchases and dividends
  • Sale of the golf business
    • After turning around Adams Golf, Chip Brewer sold the company to TaylorMade-Adidas
    • I have heard that Chip was a key player in the sale of Adams
  • Use of the NOLs
    • As ELY starts making money, the benefit of the NOLs will be clearly seen
  • Continued evidence of a successful turnaround from increased market share
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