Callaway (MODG)

Callaway (MODG)

Is Topgolf Callaway (MODG) stock a good buy?

In this article, we review Callaway stock, to determine if it’s a good buy, sell, or hold.

Callaway Golf is has been a leading sports equipment manufacturing company that designs, manufactures, markets, and sells clubs, balls, bags, gloves, and caps to customers all over the world. Recently, Callaway acquired Topgolf which is transforming the company into more of an entertainment and tech company, and we deep dive into those details within this article. 

Table of Contents

Tykr Rating

  • Summary: On Sale
  • Score: 50/100
  • MOS: 90%
  • Share Price: $21
  • Sticker Price: $106

Callaway Golf Company History

  • In 1982, Ely Callaway Jr had previously found success in the textile and wine industries and happened to be an avid golfer. Callaway was a happy customer of Hickory Sticks USA and at the time, Hickory was running low on funds and was seeking investors. Callaway had recently sold his vineyards for $9M and decided to buy 50% of the company and renamed it Callaway Hickory Stick USA.
  • In 1983, Ely Callaway Jr become president of Callaway Hickory Stick USA.
  • In 1984, Ely Callaway Jr bought the rest of the company for $400,000.
  • In 1985, Callaway hired Bruce Park as head of sales who later became Chief Merchant. Through his tenure at the company, he was responsible for generating sales in excess of $3B.
  • In 1986, Callaway hired billiard cue designer, Richard C. Helmstetter, as a consultant. Helmstetter was later named chief club designer that same year and introduced computer-controlled manufacturing machines. With master tool maker, Glenn Schmidt, the company developed the original Big Bertha driver using large-volume (190cc) clubheads. The Big Bertha driver grew to 290cc in 1997.
  • In 1988, the company name was changed to Callaway.
  • In 1996, Callaway hired Roger Cleveland as chief club designer and in 2002, launched the Callaway Golf Forge Wedges, constructed from carbon steel with modified U-grooved faces.
  • In 1996, Callaway announced the development of a new golf ball, under Chuck Yash, the former head of Taylormade Golf. The company invested $170M in a research and development facility, and a 225,000 production facility.
  • In 1996, Callaway recruited engineers from Du Pont and Boeing, to improve the aerodynamics of their golf balls.
  • In 1996, Ely Callaway resigned as CEO and President but remained as Chairman of the Board. 
  • In 1997, Callaway acquired Odyssey Sports which specifically focused on manufacturing putters.
  • In 2003, Callaway acquired Top Flite Golf and Ben Hogan Golf.
  • In 2012, Callaway sold Top Flite Golf to Dick’s Sporting Goods and Ben Hogan Golf to Perry Ellis International. Callaway preferred to offload each brand due to declining sales.
  • In 2017, Callaway acquired OGIO, a US-based bag and apparel brand, and TravisMathew, a California-based lifestyle and golf apparel brand.
  • In 2019, Callaway acquired German outdoor apparel company Jack Wolfskin.
  • In 2020, Callaway acquired Topgolf Entertainment Group for $2.6B.

Callaway Business Model

How does Callaway make money?

Callaway’s revenue is broken down into the following segments.

  • Golf clubs – 31.74%
  • Golf balls – 7.49%
  • Apparel – 15.67%
  • Gear and Accessories – 10.39%
  • Topgolf – 32.36%
  • Other – 2.35%

Callaway News

This article from The San Diego Union-Tribune talks about the acquisition of Topgolf. Topgolf is a 4-seasons sports entertainment complex with 60 locations around the world that makes golf fun and approachable for everyone. You pay between $30 and $50 per hour for a golf bay. Each bay has a golf tee with a touch screen display to pick games such Topgolf target practice, Angry Birds, Quick 9, Topscore, Topshot, Topchip, Jewel Jam, Topscramble, and more. Topgolf also serves food and drink and is known to be a great place for events and parties. 

Here are some interesting facts on Topgolf

  • Topgolf was looking to go public at a valuation of $4B in 2020 but revenues dropped from $1B down to $485M due to Covid-19.
  • The first Topgolf location opened in Watford, U.K. in the year 2000.
  • In 2019, more people visited Topgolf than the total number of people who attended professional football games in 2019.
  • In 2019, over 1 billion golf balls were hit from Topgolf tees.
  • Topgolf is big on giving back.
    • In 2016, they raised more than $1M for the Make-A-Wish foundation.
    • They donated more than 415,000 golf balls and 21,000 golf clubs to troops overseas through the Bunkers in Baghdad organization.
    • They provide educational scholarships to children and spouses of fallen and disabled service members through the Folds of Honor organization.

This article from schaeffersresearch.com states that Callaway will change its name to Topgolf Callaway Brands and the ticker will change from ELY to MODG. The acquisition of Topgolf has created a transformational shift in the game of golf. Topgolf now makes up the largest percentage of revenue in the company at 32%. Sure, people can go to a golf course and play 9 or 18 holes with golf equipment but Topgolf is the new modern way to enjoy the game.

This article from investorplace.com lists 7 stocks that could see 20% upside potential when the market corrects. These stocks include Energy Transfer, ConocoPhillips, Fortinet, Simply Good Foods Company, Callaway, Live Nation, PENN Entertainment. The article also states that the acquisition of Topgolf has allowed the company to generate year-round revenue through entertainment venues. 

This article from fool.com states that Topgolf wants to nearly double its annual players from 28 million to 57 million and expand its venue locations by 20% by 2025.

This article from forbes.com talks about the growing popularity of golf. When covid-19 hit in 2020, people needed a way to get out of the house and enjoy a safe social distancing activity. Golf proved to be the perfect answer. The big question is, did the popularity of the game continue after covid has subsided? The answer is yes! In fact, there were 18% more games of golf played in 2021 than in 2020. The PGA Tour Superstore also saw a 70% increase in sales in 2021 whereas every year prior they typically see a 1% to 2% increase. In summary, Covid-19 has significantly increased the popularity of the sport.

Callaway Competition

Nike (NKE)

  • Summary: Watch
  • Score: 56/100
  • MOS:0%
  • Share Price: $107
  • Sticker Price: $108
  • Revenue: $46B

Adidas AG (ADDYY)

  • Summary: Overpriced
  • Score: 33/100
  • MOS:0%
  • Share Price: €75
  • Sticker Price: €76
  • Revenue: €21B

Nike and Adidas do slightly overlap with Callaway but I would not classify these two companies as direct competitors. The direct competitors include TaylorMade, Ping, Titleist, Cleveland, Mizuno, Cobra, and Bridgestone which all happen to be private companies and only focus on clubs, balls, and apparel. None of these competitors owns a Topgolf-like subsidiary.

Callaway 4Ms

✔️ MOS: The score is okay with a 50/100. We like to see a score over 50 so Callaway just barely crosses that line to qualify as On Sale. The MOS is fantastic at 90%. There is definite upside potential with this stock.

✔️ Meaning: The acquisition of Topgolf proved to be a wise investment. Topgolf is a simple yet lucrative business model. These entertainment venues generate revenue through bay rentals, parties, lessons, memberships, food, drink, and more. The business has proven to make golf more accessible and fun for people of all ages. It’s also important to highlight that golf is growing in popularity due to Covid-19. People have found golf to be a great way to enjoy the outdoors and enjoy time with friends and family. Because of this, most golf brands should see an increase in sales.

✔️ Moat: There are a lot of strong competitors in this space, especially on the equipment and apparel side including TaylorMade, Ping, and Titleist. The advantage that Callaway has is Topgolf. The acquisition of this company definitely expanded the moat and positioned Callaway for growth over the coming years.

✔️ Management: Oliver “Chip” G. Brewer III has served as President and CEO since 2021. He was Director of Topgolf from 2012 to 2021. Soon after Callaway acquired Topgolf, they appointed Brewer as the new CEO of Callaway, which shows the company is embracing technology as a strong driver for growth. Before he served as Director at Topgolf, he served as President and CEO of Adams Golf from 2002 to 2012. The Glassdoor score of Callaway is 3.8/5.0 and the CEO approval is 89%. Ideally, we like to see a Glassdoor score greater than 4.0. When looking at the reviews, I see a lot of bad comments about management such as “Good ol’ boys club” where buddies only promote other buddies and management is disconnected from lower-level employees. Although the company score is 3.8, the CEO approval of Brewer is 89% which is very good. This tells us Brewer is not only transforming the company with technology, thanks to Topgolf, but he may be changing the culture for the best. Let’s hope he can rattle the cages and break apart the “Good ol’ boys club”. 

Callaway Financials

Now let’s take a look at the financials. A wise investor should be able to read the income statement, cash flow statement, and balance sheet and within 60 seconds have a pretty good idea of how the business is performing.

Revenue (Found on the Income Statement)

  • 2018: $1.2B
  • 2019: $1.7B
  • 2020: $1.5B
  • 2021: $3.1B
  • The 2021 revenue significantly increased due to the additional revenue provided by Topgolf.

Net Income (Found on the Income Statement)

  • 2018: $104M
  • 2019: $79M
  • 2020: -$126M
  • 2021: $321M
  • The net income has substantially increased in 2021 which is a great sign.

EPS (Found on the Income Statement)

  • 2018: 1.11
  • 2019: .84
  • 2020: -1.35
  • 2021: 1.9
  • EPS has also substantially increased.

Free Cash Flow (Found on the Cash Flow Statement)

  • 2018: $55M
  • 2019: $31M
  • 2020: $188M
  • 2021: -$44B
  • Free Cash Flow has declined. This is a reason why the score is closer to 50/100. 

Total Assets (Found on the Balance Sheet)

  • 2018: $1B
  • 2019: $1.9B
  • 2020: $1.9B
  • 2021: $7.7B
  • Total Assets have substantially increased since 2020 which is a good sign.

Total Liabilities (Found on the Balance Sheet)

  • 2018: $318M
  • 2019: $1B
  • 2020: $1.3B
  • 2021: $4B
  • Total Liabilities have increased due to the acquisition of Topgolf. Topgolf has venue locations (real estate) and a lot of employees. This isn’t necessarily bad, it just comes with the nature of a franchise business model.

Total Debt (Found on the Balance Sheet)

  • 2018: $9M
  • 2019: $450M
  • 2020: $716M
  • 2021: $2.9B
  • Total Debt has increased in 2021 because of the acquisition of Topgolf. Similar to the increase in liabilities, this isn’t necessarily bad. There are probably several venue locations that Topgolf doesn’t own which means loans are in place. As long as revenue per location increases, Topgolf will continue to be a solid revenue driver for Callaway. 

Total Equity (Found on the Balance Sheet)

  • 2018: $724M
  • 2019: $767M
  • 2020: $675M
  • 2021: $3.6B
  • Total Equity has substantially increased in 2021 due to Topgolf. 

Is Callaway stock a good buy?

The acquisition of Topgolf has proven to separate Callaway from the competition and it will be exciting to see where this company goes in the coming years.

From an investment standpoint, this stock probability won’t generate big returns like a software company but it may be a good stock to add a little diversification to your portfolio. 

The Summary, Score, and MOS of this stock may have changed since the posting of this review. Please login to Tykr to see up-to-date information.

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