Callaway Presentation

CFA Ins(tute Research Challenge 2013-‐2014 San Diego State University

Summary Compe((ve Posi(oning Financials Valua(on Risk Analysis Conclusion

Investment Summary

Investment Highlights •  (+) New management’s cost ini(a(ves •  (+) Focus on core competencies •  (+/-‐) High degree of opera(ng leverage •  (-‐) High end market risk

4

5

6

7

8

9

10

1/1/09 7/1/09 1/1/10 7/1/10 1/1/11 7/1/11 1/1/12 7/1/12 1/1/13 7/1/13 1/1/14

Closing Price Current Price Target Price

7.11% upside

Recommenda(on: HOLD

Target Price: $9.79

Market Price: $9.14

As of 1/21/14

March 2012: Chip Brewer becomes CEO

July 2012: Cost Ini@a@ves announced

12-‐month target


Company Overview

1982: Callaway founded in Carlsbad, CA

1992: IPO on New York Stock Exchange (NYSE: ELY)

1998: Stock price drops from $31 to $9

2012: Chip Brewer named CEO

Drivers and fairway woods

24%

Irons 20%

PuGers 11%

Golf balls 17%

Accessories and other

28%

Product PorLolio

US 49%

Europe 15%

Japan 18%

Rest of Asia 9%

Other 9%

Global Sales

COMPETITIVE POSITIONING Industry Overview, Compe(tor Rivalry, & Compe((ve Floor Analysis


Industry Overview

0

1

2

3

4

5

Threat of New Entrants

Threat of Subs(tute Products

Bargaining Power of Customers

Bargaining Power of Suppliers

Compe((ve Rivalry within the Industry

Porter's Five Forces

Key characteris@cs: •  High entry barriers •  Luxury goods market •  Specialized manufacturing

processes •  Highly saturated market

Spor@ng Good Industry CAGR: 4.0% Golf Segment CAGR: 2.4%

5 = most favorable to the company 1 = least favorable to the company


Compe@@ve Rivalry

18.7% 19.1% 18.7% 19.6%

17.5% 17.6% 17.3%

15.1% 13.9%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2004 2005 2006 2007 2008 2009 2010 2011 2012

Callaway’s U.S. Market Share (Hard goods)


Compe@@ve Advantage

Compe((ve Posi(oning

•  Semi-‐annual product release •  Improving brand image •  Increased profit margin

-‐0.1

-‐0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

0 0.5 1 1.5 2 2.5 3

Profi

t Margin

Asset Turnover

ROA & Compe@@ve Advantage

Industry Average

FINANCIALS Core Competency Sales, Cost Ini(a(ves & Earnings

Core Competencies


-‐25.00%

-‐20.00%

-‐15.00%

-‐10.00%

-‐5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

2008 2009 2010 2011 2012 2013

YOY Sales Growth Core Products

Accessories

Cost Ini@a@ves


0

100

200

300

400

500

600

700

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E

COGS

OPEX

$60 million annual savings = $19 million COGS + $41 million OPEX

Profit Margin


-‐25%

-‐20%

-‐15%

-‐10%

-‐5%

0%

5%

10%

-‐400

-‐200

0

200

400

600

800

1000

1200

2010 2011 2012 2013E 2014E

Revenues Net Income Profit Margin

•  Lower inventory •  Higher asset-‐turnover

•  Results in increased: •  Revenue •  Profit margin •  Net income

VALUATION Mul(ples Pricing & DCF Valua(on


Mul@ples Pricing

Peer Group Selec(on Criteria: •  Luxury goods as primary source of

revenues •  Small Cap Companies •  Comparable Financial Ra(os

0.00

0.50

1.00

1.50

SWHC NLS DKS BC LF

2014 Es@mate

Peer Group EV/Sales

Mul@plier EV/Sales

Forecasted Year

Mul(ple (Median)

Enterprise Value

Equity Value

2013E 2014E

1.14x 1.1x

$957.2 $1014.1

$887.5 $944.4

2014 Target Price $10.31

Mul@ples Pricing

0.00%

20.00%

40.00%

60.00%

NLS LF ELY SWHC DKS BC

Profitability 10 Year Median

Gross Margin Opera(ng Margin

0

2

4

6

ELY DKS LF BC SWHC NLS

Performance 10 Year Average

Asset Turnover Inventory Turnover

0

1

2

3

4

DKS BC NLS SWHC ELY LF

Liquidity 10 Year Average

Quick Ra(o Current Ra(o


•  Gross margins typical of consumer discre(onary sector

•  Low asset turnovers across industry •  Strong liquidity among peers

DCF Assump@ons

ELY

Mean Peer Unlevered Beta 1.17

Debt / Equity 31.30%

Target Marginal Tax Rate 38.50%

Re-‐levered Beta 1.40


Cost of Debt Cost of Debt 3.75% Tax Rate 38.50% Aher-‐tax Cost of Debt 2.31%

Cost of Equity Risk-‐free Rate 2.83% Market Risk Premium 7.75% Levered Beta 1.40 Cost of Equity 13.68%

WACC 10.97% -‐5 -‐4 -‐3 -‐2 -‐1 0 1 2 3 4 5

Degree of Opera@ng Leverage

Key Drivers •  (+) Semi-‐annual product releases •  (+) Chip Brewer’s proven leadership •  (+/-‐) High degree of opera(ng

leverage •  (-‐) Market sensi(vity

Target Price

$9.57 USD

$10.31 USD

$9.79 USD

30% Mul@ples Valua@on

70% DCF Valua@on

2014 Year End Target Price Upside: 7.11%

Holding Period Return: 7.22%


RISK ANALYSIS Opera(onal, Financial, Poli(cal & Market


Risk Analysis

Significant

Losing Exis(ng Suppliers

Limited Growth

Opportunity Mod

erate

Conflict Minerals

Market Demand

Exchange Rate Risk

Minor

Input Price Fluctua(on Seasonality

Low Medium High

IMPACT

PROBABILITY


Risk Analysis

Significant


Limited Growth

Opportunity Mod

erate

Conflict Minerals

Market Demand

Exchange Rate Risk

Minor


Low Medium High

IMPACT

PROBABILITY


Risk Analysis

Significant


Limited Growth

Opportunity Mod

erate

Conflict Minerals

Market Demand

Exchange Rate Risk

Minor


Low Medium High

IMPACT

PROBABILITY


Risk Analysis

Significant


Limited Growth

Opportunity Mod

erate

Conflict Minerals

Market Demand

Exchange Rate Risk

Minor


Low Medium High

IMPACT

PROBABILITY

CONCLUSION Hold Recommenda(on

Summary Compe((ve Posi(oning

Financials & Valua(on Risk Analysis Conclusion

Conclusion

Hold

(+) New management’s cost ini(a(ves

(+) Core competency

focus

(+/-‐) High degree of opera(ng leverage

(-‐) High market risk

Summary Compe((ve Posi(oning

Financials & Valua(on Risk Analysis Conclusion

Ques@ons?

Q & A

Links

Documents

Callaway Presentation