You would possibly suppose that golf is a mature, unexciting enterprise. However do not inform that to Callaway (NYSE: ELY), the maker of Massive Bertha drivers and Odyssey putters. Golf is among the few out-of-home actions that’s comparatively protected amid the COVID-19 pandemic, and the business noticed an unbelievable leap in play this summer time. In keeping with Callaway, September rounds performed are up about 25% in contrast with final yr.
Not solely that, however Callaway simply made an enormous acquisition, betting large on what may very well be the tech-enabled way forward for the game. Actually, the wager is so large that Callaway’s latest acquisition is extra like a merger of equals — and it might both catapult Callaway into amore thrilling development stock standing, or doubtlessly sink it as nicely.
Picture supply: Getty Pictures.
Callaway merges with Topgolf
In late October, Callaway introduced it will be buying Topgolf for roughly $2 billion in stock, whereas additionally assuming Topgolf’s $555 million in debt. Topgolf is a tech-oriented driving vary, restaurant, and leisure super-center that has skilled speedy development since its founding in 2005.
Topgolf at present has 58 U.S. driving vary venues and 5 worldwide venues, with a few of them franchised. In 2019, the corporate made $1.1 billion in income, rising 30%, and $59 million in adjusted EBITDA. Topgolf additionally has a tech ingredient to it, having developed its Toptracer expertise that tracks a ball mid-flight, present swing and shot information, and offers the flexibility to play simulated programs on its ranges. Topgolf has additionally developed a free-to-pay cellular online game referred to as World Golf Tour with 30 million members that’s monetized by in-game advertisements in addition to micro-transactions.
Be mindful, adjusted EBITDA shouldn’t be the identical factor as income or cash movement, and the corporate is not worthwhile proper now – particularly as COVID-19 has broken visitors to Topgolf. Nevertheless, as soon as the atmosphere normalizes, Topgolf expects to be free cash movement constructive, earlier than development investments, by 2022, and free cash movement constructive general by 2024.
Wall Street did not just like the transaction
The short-term response was a fast 25% drop in Callaway’s share price on the Oct. 27 announcement, as traders may have seen the transaction as a robust enterprise shopping for a weaker one.
Callaway’s core enterprise was up 12% within the third quarter as folks flocked to golf programs amid COVID and purchased gear, and earnings per share rocketed 67% as working bills declined in the identical atmosphere. So, Callaway is utilizing its present sturdy place to opportunistically buy Prime Golf, whose enterprise is down amid COVID.
Topgolf’s model really extra resembles different out-of-home shopper discretionary corporations similar to eating places, motion pictures, and bowling fairly than golf programs in broad open areas. The corporate will get roughly one third of its income from sport play, one third from meals and beverage, and one other third from company occasions. As such, enterprise is down, however slowly bettering. The corporate mentioned it had lastly absolutely reopened solely as of September.
Nevertheless, Callaway’s price has since recovered practically all of the place it was earlier than the announcement of the transaction on the again of sturdy earnings in addition to constructive vaccine information.
However there is a vital bull case
Regardless of Wall Street’s preliminary response, as soon as the world returns to regular, there’s a likelihood this acquisition might appear like a genius transfer down the street. First, the addressable development runway for Topgolf may be very giant, a minimum of in keeping with the corporate. From 58 venues in the present day, administration envisions an addressable market of 200 U.S. venues. Internationally, the chance is even bigger, with simply 5 venues in the present day and a market alternative of 250. Topgolf might additionally franchise most of those worldwide venues, giving it a gradual stream of lower-risk cash movement.
The expertise aspect of Topgolf additionally should not be ignored. Its Toptracer expertise has been proven to extend engagement and visitors at its venues. Moreover, Topgolf licenses Toptracer to different driving ranges as nicely. The annual license income may very well be a further high-quality income stream, and the market is giant, since there are lots of extra conventional driving ranges than Topgolfs. And naturally the online game business may be very sturdy everywhere in the world, so the jury is out how a lot World Golf Tour can develop, or if the corporate can observe up with different video games.
Lastly, there are ample cross-selling alternatives. Many Topgolf guests are non-golfers or informal golfers, which Callaway will little question attempt to convert to extra full-time golfers to which to promote gear. On the identical time, Callaway’s established distribution footprint amongst membership execs and different retailers provides it one other channel by way of which to advertise Topgolf merchandise similar to Toptracer or video games.
However there are dangers to think about
Regardless of the attention-grabbing potential of Toptracer and video games, most of Topgolf’s income and income come from its venues, and these venues take a good quantity of capital with excessive mounted prices. Over the following three years, the mixed corporations intend to burn $325 million in cash, investing in new venues, tech capabilities, and venue upkeep. As a considerably luxurious, absolutely staffed expertise, these excessive mounted prices imply that individuals might want to refill Topgolfs constantly and nicely into the long run. Whereas the corporate is about 15 years previous, it is nonetheless unclear if there can be sufficient demand going ahead to fill the footprint it envisions. In spite of everything, excessive mounted prices work each methods.
A path to development
The variety of “on-course” golfers has stagnated over the previous decade, whereas “non-course” golfers who attend ranges and venues like Topgolf have grown at a 6.5% price since 2014. As such, it is no shock that Callaway is attempting to purchase itself into extra of a development business. Provided that the pandemic has supplied a short-term bump to Callaway’s legacy enterprise and damage Topgolf, the acquisition might find yourself being a genius piece of timing on administration’s half — that’s, if Topgolf can proceed to refill its large leisure complexes post-pandemic.
Will it work? Potential traders may want to check out a Topgolf close to you; in case you’re impressed, then by all means, make investments! If it does not “wow” you, there may be different higher choices within the stock market.
10 stocks we like higher than Callaway Golf
When investing geniuses David and Tom Gardner have a stock tip, it may possibly pay to hear. In spite of everything, the publication they’ve run for over a decade, Motley Idiot Stock Advisor, has tripled the market.*
David and Tom simply revealed what they imagine are the ten finest stocks for traders to purchase proper now… and Callaway Golf wasn’t considered one of them! That is proper — they suppose these 10 stocks are even higher buys.
See the 10 stocks
*Stock Advisor returns as of October 20, 2020
Billy Duberstein has no place in any of the stocks talked about. His purchasers may personal shares of the businesses talked about. The Motley Idiot has no place in any of the stocks talked about. The Motley Idiot has a disclosure coverage.
The views and opinions expressed herein are the views and opinions of the writer and don’t essentially mirror these of Nasdaq, Inc.