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Callaway Golf: Can Its Shares Drive Higher?

For a while it lookFor a while it looked like golf was a dying sport with little hope of turning around its fortunes. The lack of a high-profile star to replace Tiger Woods and a seemingly lack of interest from millennials was blamed for the falling participation numbers. But against the odds recent data shows that the sport is making a comeback and participation levels are rising.

Clearly this would be bad news for Callaway and it's understandable that many felt the company was one to avoid. But we feel this view was too short-sighted and are pleased to see that golf is not only surviving, but in many respects thriving. Recent data from the National Golf Foundation, or NGF, shows that 2016 was a record year for new golf participants. According to the release, the total number of beginner golfers (those playing on a golf course for the first time) rose to a record-high of 2.5 million in 2016. Interestingly, in the 18-34 young adult category there was a high percentage of female golfers (29%) and non-Caucasian golfers (24%). We think this shows that golf's appeal is broadening.

How did this happen in the absence of a star attraction? Well it seems as though you don't need Tiger Woods when you have the Topgolf entertainment center. As well as profiting from its growing popularity through its 15% ownership, we expect Callaway to benefit as the roll-out of Topgolf worldwide introduces more and more consumers to the sport. Most notably the millennial generation. Which is hugely important when you consider that baby boomers are ageing and their golf playing days are limited.

We have forecast earnings per share of 30 cents in FY 2017, growing to 40 cents in FY 2018. While this is slightly ahead of the consensus estimate, we feel that a weaker U.S. dollar and increasing participation levels could lead to an earnings surprise. With the market expecting earnings growth in excess of 30% per annum for the next five years, we think an earnings multiple of 30x earnings is fair for its shares to trade at.

Unfortunately, this gives us a 12-month price target of $9.00 and a 24-month price target of $12.00. So with its shares currently trading at $11.87, we see little upside potential at the current share price. As a result, we would suggest that investors hold off an investment for the time being and wait patiently for a pull-back.

Overall, we think Callaway is a great option for investors given the revival of golf, but only at the right price.

ed like golf was a dying sport with little hope of turning around its fortunes. The lack of a high-profile star to replace Tiger Woods and a seemingly lack of interest from millennials was blamed for the falling participation numbers. But against the odds recent data shows that the sport is making a comeback and participation levels are rising.

Clearly this would be bad news for Callaway and it's understandable that many felt the company was one to avoid. But we feel this view was too short-sighted and are pleased to see that golf is not only surviving, but in many respects thriving. Recent data from the National Golf Foundation, or NGF, shows that 2016 was a record year for new golf participants. According to the release, the total number of beginner golfers (those playing on a golf course for the first time) rose to a record-high of 2.5 million in 2016. Interestingly, in the 18-34 young adult category there was a high percentage of female golfers (29%) and non-Caucasian golfers (24%). We think this shows that golf's appeal is broadening.

How did this happen in the absence of a star attraction? Well it seems as though you don't need Tiger Woods when you have the Topgolf entertainment center. As well as profiting from its growing popularity through its 15% ownership, we expect Callaway to benefit as the roll-out of Topgolf worldwide introduces more and more consumers to the sport. Most notably the millennial generation. Which is hugely important when you consider that baby boomers are ageing and their golf playing days are limited.

We have forecast earnings per share of 30 cents in FY 2017, growing to 40 cents in FY 2018. While this is slightly ahead of the consensus estimate, we feel that a weaker U.S. dollar and increasing participation levels could lead to an earnings surprise. With the market expecting earnings growth in excess of 30% per annum for the next five years, we think an earnings multiple of 30x earnings is fair for its shares to trade at.

Unfortunately, this gives us a 12-month price target of $9.00 and a 24-month price target of $12.00. So with its shares currently trading at $11.87, we see little upside potential at the current share price. As a result, we would suggest that investors hold off an investment for the time being and wait patiently for a pull-back.

Overall, we think Callaway is a great option for investors given the revival of golf, but only at the right price.