Topgolf Callaway Brands: Profiting from a Growing Trend
Topgolf Callaway Brands is profiting from the increasing number of people who are starting to play golf. Both on-course and off-course golf participation in the United States has recently surpassed 40 million, marking a significant milestone. The reason is that off-course golf attracts a different demographic than traditional golfers, and off-course golf is now larger than on-course golf. Topgolf Callaway Brands is the dominant player in the off-course golf industry, which positions it to benefit from this growing trend. But does it mean that it will be a good investment?
This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since attending the workshop with Phil Town, I have decided to make some changes to the layout of my analyses. I will perform additional calculations and also provide a brief explanation of why the company is significant to me. If you want to learn more about my company evaluation process, please visit the "MY STRATEGY" section on my website.
For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares of Topgolf Callaway Brands. If you would like to view the stocks in my portfolio or copy my portfolio, you can do so on eToro. Instructions on how to do so can be found here. I don't own any stocks in Topgolf Callaway Brands' competitors either. Thus, I have no personal stake in Topgolf Callaway Brands. If you want to purchase shares (or fractional shares) of Topgolf Callaway Brands, you can do so through eToro. eToro is a highly user-friendly platform that allows you to start your investment journey with as little as $50.
Topgolf Callaway Brands was founded as Callaway Golf Company in 1982 in California, United States. With the acquisition of Topgolf in 2021, the company changed its name to Topgolf Callaway Brands in 2022. Topgolf Callaway Brands is a contemporary golf and active lifestyle company that offers golf entertainment experiences, designs and produces high-quality golf equipment, and sells golf and active lifestyle accessories through various brands such as Topgolf, Callaway, Odyssey, TravisMathew, Jack Wolfskin, and OGIO. Topgolf Callaway Brands has three business segments: Topgolf, Golf Equipment, and Active Lifestyle. Topgolf offers off-course golfing venues (think of it as the golfing equivalent of a bowling alley), in which they generate revenue from gameplay, the sale of food and beverages, and events. By the end of 2022, Topgolf had 77 company-operated venues in the United States, 4 company-operated venues in the United Kingdom, and 5 franchised venues in Australia, Mexico, the United Arab Emirates, Thailand, and Germany. Topgolf also licenses Toptracer, a ball-tracking technology. In addition, their digital media platform includes a mobile golf game and other digital content creation. Topgolf contributes 39% of the revenue. Golf Equipment designs, manufactures, and sells high-quality golf equipment, including golf clubs and golf balls, under the brands Callaway and Odyssey. Topgolf Callaway Brands holds a 25% share of the global market for golf clubs and a 21% share of the global market for golf balls. Golf Equipment contributes with 35% if the revenue. Active Lifestyle designs, develops and sells high quality soft good products under the Callaway, TravisMathew, OGIO and Jack Wolfskin brands. These products include golf apparel, footwear, golf accessories, hats, luggage, backpacks, jackets, trousers, dresses, skirts, tents and sleeping bags. Active Lifestyle contributes with 26% of the revenue. As Topgolf Callaway Brands is the dominant brand for off-course golfing and holds a significant global market share in golf equipment, I believe that Topgolf Callaway Brands has a brand moat.
Their CEO is Oliver "Chip" Brewer. He joined Topgolf Callaway Brands (formerly known as Callaway Golf Company) in 2012 as CEO. Prior to joining Topgolf Callaway Brands, he served as the CEO of Adams Golf. He earned an MBA from Harvard University in 1991. Oliver "Chip" Brewer is a golf enthusiast and has previously served on the board of the National Golf Foundation. In an interview, he stated that one does not need to be an avid golfer to run a golf equipment company. However, he also acknowledged that the golf industry can be deceptively tricky to comprehend. We don't have much information on Oliver "Chip" Brewer, but since he became CEO, he hasn't been afraid to sell off underperforming brands such as Top-Flite and Ben Hogan, or make acquisitions such as TravisMathew and Jack Wolfskin. He also dared to acquire Topgolf Entertainment Group, which forever altered Callaway Golf Company. According to Comparably, Oliver "Chip" Brewer has an employee rating of 93/100, which puts him in the top 5% of similarly sized companies. Personally, I believe that Oliver "Chip" Brewer's extensive industry experience and his boldness in selling and acquiring brands/businesses make me very confident in his ability to lead Topgolf Callaway Brands in the future.
I believe that Topgolf Callaway Brands has a moat, and I also have a positive opinion of their management. Now, let us investigate the numbers to determine if Topgolf Callaway Brands meets our criteria for having a strong competitive advantage. In case you want an explanation about what the numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will investigate is the return on invested capital, also known as ROIC. I would like a 10-year history with all figures exceeding 10% for each year. The ROIC (Return on Invested Capital) of Topgolf Callaway Brands has been inconsistent, with some years showing negative ROIC, some years with underwhelming ROIC, and some years exceeding the required 10%. In 2020, when Topgolf Callaway Brands reported its latest negative ROIC, it was during the pandemic. At that time, Topgolf Callaway Brands was a different company. Topgolf Callaway Brands hasn't been able to deliver a high return on invested capital (ROIC) since the acquisition of Topgolf, but this is not alarming because the acquisition is still relatively new. Nonetheless, I would like to see a higher return on invested capital (ROIC) moving forward.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. Topgolf Callaway Brands has consistently increased their equity every year since 2014, with the exception of 2020, when it was negatively impacted by the pandemic. Their equity received a boost in 2021 with the acquisition of Topgolf, and it is encouraging to note that Topgolf Callaway Brands was able to further increase their equity from 2021 to 2022.
Finally, we will investigate the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has remaining after paying all of its financial obligations. I use margins to enhance clarity and improve understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is projected to generate in relation to its market value per share. Topgolf Callaway Brands had consistently achieved a positive free cash flow in most years prior to their acquisition of Topgolf. Since the acquisition, Topgolf Callaway Brands has experienced negative free cash flow, which is concerning. However, management expects to achieve positive free cash flow once again in 2023.
Another important aspect to consider is the level of debt. It is crucial to determine whether a business has manageable debt that can be repaid within a three-year period. We calculate this by dividing the total long-term debt by earnings. After performing the calculation on Topgolf Callaway Brands, I found that the company has 11,62 years of earnings in debt. The reason for the high debt is the acquisition of Topgolf, which could prove to be a wise decision in the long run. Nonetheless, the high debt is a concern.
Based on my findings thus far, I believe that Topgolf Callaway Brands is an intriguing company. However, no investment is without risk, and Topgolf Callaway Brands also has its fair share of risks. One risk is competition. Topgolf Callaway Brands faces competition in all of its business segments. While Topgolf is a dominant player in off-course golfing, it faces competition from other out-of-home entertainment options such as movie theaters, sporting events, bowling alleys, nightclubs, bars, and restaurants. The Golf Equipment segment competes against various brands such as TaylorMade, Ping, and Acushnet in both golf clubs and golf balls. The Active Lifestyle segment is also facing competition from brands such as Nike, Ted Baker London, The North Face, and Patagonia. Macroeconomics. Unfavorable economic conditions could negatively impact consumer discretionary spending. According to their annual report, consumers are generally more willing to make discretionary purchases of golf products and spend on leisure and out-of-home entertainment during favorable economic conditions when they are feeling confident and prosperous. Thus, if there is a prolonged economic downturn, it will have a negative impact on the performance of Topgolf Callaway Brands. Debt. In his book "Rule #1 Investing," Phil Town mentions the following about debt: "A business that carries a significant amount of debt compared to its income faces an uncertain financial future." "If there are any problems with the economy, a business with a significant amount of loans might be in big trouble". As an investor, I dislike unpredictability. Although I don't believe that Topgolf Callaway Brands will go bankrupt, I am concerned about companies with substantial debt. I believe that Topgolf Callaway Brands should focus on paying off some of their debt, especially now that interest rates are increasing.
There are also numerous reasons to invest in Topgolf Callaway Brands. One reason is the Topgolf segment. Management expects that the Topgolf business will add 3 to 4 million new customers each year for every 11 new venues it opens. It means that Topgolf will soon have more consumers visiting their venues than the total number of people playing golf on traditional courses. Furthermore, approximately 75% of the non-golfers who visit Topgolf show interest in trying out on-course golf, which could potentially lead to increased sales in their other segments. Management has also mentioned that Topgolf venue margins are improving. Additionally, they are expecting Topgolf venue sales to grow beyond the inflationary costs. The Golf Equipment segment. Management believes that they are the technological leader in every golf club and golf ball market they compete in, which should give them an advantage over competitors. Thus, Topgolf Callaway Brands is gaining market share. Furthermore, they have increased production at their golf ball plant, and as efficiencies improve, so do margins. The Active Lifestyle segment. Topgolf Callaway Brands is also experiencing growth in the Active Lifestyle segment. TravisMathew sales have grown by double digits for several quarters, while Jack Wolfskin is on track to generate steady growth in both revenue and profits in 2023. Furthermore, margins are also improving. In the latest quarter, the gross profit margin for the segment improved by 330 basis points. Thus, the segment is becoming more profitable.
Now it is time to calculate the price of shares in Topgolf Callaway Brands. I perform three different calculations that I learned at a Phil Town seminar. The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 0,82, which is from 2022. I have selected a projected future EPS growth rate of 15% (Finbox estimates EPS to grow by 15,1%). Additionally, I have chosen a projected future P/E ratio of 30, which is twice the growth rate. This decision is based on the fact that Topgolf Callaway Brands has historically had a higher P/E ratio. Lastly, our minimum acceptable rate of return is already set at 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $24,60. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Topgolf Callaway Brands at a price of $12,30 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is called the Ten Cap price. The rate of return that an owner of a company (or stock) receives on the purchase price of the company is essentially its return on investment. The return should be at least 10% annually, and I calculate it as follows: The operating cash flow last year was -9, and capital expenditures were 556. I attempted to review their annual report to determine the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated for maintenance purposes. This means that we will use 389 in our calculations. The tax provision was -53,2. We have 184,7 outstanding shares. Since all numbers are negative, it is not possible to perform the Ten Cap calculation.
The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. However, Topgolf Callaway Brands had a Free Cash Flow Per Share of $-3,07. Thus, it is not possible to make the Payback Time calculation.
I believe that Topgolf Callaway Brands is an interesting company. And while we don't have much information about the management team, I am confident that they are well-equipped to lead Topgolf Callaway Brands moving forward. This confidence stems from their extensive experience in the industry. Topgolf Callaway Brands is facing some short-term risks due to the current economic conditions, which could adversely impact its results in the near future. Competition is a long-term risk for Topgolf Callaway Brands as they face competition in all of their segments. However, their Golf Equipment and Active Lifestyle brands have moats that should protect them from competition, while Topgolf offers a unique experience that none of their competitors can replicate. The high debt is concerning, but management has mentioned that they will use the positive free cash flow to pay off debt. What makes Topgolf Callaway Brands intriguing is their growth across all segments, and the anticipated margin improvements that will result in positive free cash flow by 2023. Furthermore, they are a dominant player in off-course golfing, which is a capital-intensive business. This implies that there are high barriers to entry. It is also worth noting that insiders have bought shares above the current trading price over the last 12 months. I believe that investing in Topgolf Callaway Brands could be interesting, but due to its low return on invested capital (ROIC) and the current short-term uncertainty, I would only consider buying it if it is priced at a 50% discount to its intrinsic value. This means that I would purchase Topgolf Callaway Brands below the Margin of Safety price at $12,30.
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