Fans of
Topgolf Callaway Brands,
one of the few pure-play golf stocks, think it can deliver the investment equivalent of a hole-in-one. But lately, the performance of its shares has resembled a poorly struck shot into the deep rough.
The stock (ticker: MODG) cratered by 13%, to $18.80, on May 10, the day after Topgolf reported first-quarter results, and closed on Friday at $17.28. While earnings, at 17 cents a share, beat the consensus 15 cents estimate, the positive news was accompanied by reduced guidance for one segment of operations, and Wall Street likes lowered guidance the way players in the PGA tournament, which starts next week, like sand traps and water hazards.
However, the bull case remains. Jonathan Boyar, president of Boyar Intrinsic Value Research, says the selloff makes Topgolf Callaway more attractive. “It’s just giving investors a great entry point to own a fast-growing business,” he contends.
That business has three segments:
The Topgolf unit operates driving ranges where people can compete against one another or just hang out. These feature the company’s Toptracer ball-flight tracking technology, and include hitting bays, bars, dining areas, and special-event spaces. Stay-at-homes can play Topgolf’s World Golf Tour videogame.
| Headquarters | Carlsbad, Calif. |
|---|---|
| Recent Price | $17.59 |
| YTD Change | -11% |
| 2023E Sales (bil) | $4.4 |
| 2023E Net Income (mil) | $124 |
| 2023E EPS | $0.67 |
| 2023E P/E | 26.4 |
| Market Value (bil) | $3.3 |
| Dividend Yield | None |
E=estimate
Source: FactSet
The driving ranges attract both “on-” and “off-course” golfers (those who don’t want to venture onto an actual course). They draw in families, too. On a recent Sunday morning at Topgolf’s Edison, N.J., venue, a gaggle of children were hitting shots during a birthday party. A few bays away, two adults were having a great time hitting most of their balls 50 to 100 yards—not far, but no one seemed to care. The average age of an off-course-only golfer is 31, compared with 46 for the on-course cohort, according to the National Golf Foundation. The off-course population also skews more heavily toward women and minorities.
Topgolf’s second business segment, Golf Equipment, sells clubs and balls, marketed under brands including Callaway, Odyssey, Strata, and the newest: Paradym.
The third segment, Active Lifestyle, offers apparel, footwear, and golf accessories such as bags, gloves, hats, and other items under the Callaway, JackWolfskin, and TravisMathew brands.
The quarter’s problem child was the corporate-event business, which accounts for about 20% of the Topgolf unit’s revenue. Same-venue sales growth this year is expected to be in the mid- to high-single digits. Prior guidance was for high-single digit gains.
That aside, there’s a lot to like about Topgolf Callaway, especially in the longer term. In the quarter, the Carlsbad, Calif., company’s year-over-year same-store sales grew 11% at its ranges. And first-quarter results were aided nicely by the new Paradym brand.
CEO Chip Brewer cautioned analysts on the quarterly earnings call that the corporate-event business’ woes don’t change the company’s up to $640 million estimate of 2023 earnings before interest, taxes, depreciation, and amortization, or Ebitda. “I don’t want to give you the impression that this just fell off a cliff,” he said.
Randal Konik, a Jefferies analyst who has a Buy rating on the shares, points out that key parts of the business-event segment remain strong, notably walk-in customers and small-business events.
Formerly named
Callaway Golf
and famed for high-end equipment such as its signature Big Bertha drivers, the company in 2021 acquired privately held Topgolf Entertainment Group for about $2.5 billion in an all-stock deal.
Topgolf now operates about 80 high-tech driving venues around the country, in major markets such as Los Angeles and Philadelphia, and in smaller ones, including Boise, Idaho. It also has a few ranges overseas. The venues, which have a sports-bar feel, feature wraparound couches and raised tables in individual bays where up to six customers can play together.
Topgolf’s ball-tracing technology quickly reports the length, speed, hang time, height, and curve of every shot on a screen in each bay. There’s a full menu of drinks, comfort food such as nachos and chicken wings, and plenty of TVs airing sports programming.
The Topgolf buy provided much-needed spice to the company’s growth profile. It has been adding about 11 venues every year in the U.S., most recently in Charleston, S.C., and plans to continue that pace until it hits 250.
“You’ve got a very solid golf-equipment business that generates a good amount of cash flow, but at the same time, the growth engine is going to be Topgolf for the next decade-plus,” says Joe Altobello of Raymond James. Although he cut his price target to $30 from $35 recently, he has kept his Outperform rating. That’s based on a blended multiple of 12.5 times projected Ebitda—16 times for the faster-growing Topgolf business, and 10 times for the legacy Callaway operations.
The Topgolf segment’s Ebitda totaled $235 million last year, about 42% of the company’s total. The company has said that it expects that segment to chip in about half of this year’s Ebitda. Brewer told Barron’s after the earnings call that he expects that “Topgolf will be the majority of our Ebitda and revenue at some point in the near future.”
Golf, which struggled in 2000-10, ended a long slide in 2015, measured by rounds played. And it got a big boost in 2020 and 2021, during the worst of the pandemic, since it’s played outdoors and players can easily maintain social distancing. While rounds played in the U.S. were about flat in the first quarter, they’re still well above 2019’s prepandemic level, according to the National Golf Foundation, which won’t divulge specific totals.
CEO Brewer estimates that the addition of 11 Topgolf venues each year will add three million to four million new off-course golfers to its mix.
All in all, once it gets out of the bunker it’s currently in, Topgolf stock should land squarely on the green.
Write to Lawrence C. Strauss at [email protected]
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