We’re reaching the critical time of the year as it relates to golf equipment sales. Usually as the first major tournament of the year (The Masters which was supposed to be this week) rolls around, golfers are ready to hit the links. Yet today, all of the US golf majors are pushed until after August (at least). Additionally, late March to late April is when much of the country has demo days for golfers and club members to try and buy all of the new year's equipment. Acushnet’s Titleist T-series irons were likely to be a big hit this spring. The problem is many of the golf facilities in the US that facilitate these sales are closed. In the Metropolitan PGA for example (which serves the greater NYC area), leadership in late March gave the guidance for every golf facility to be closed and professionals and employees to remain home (outside of grounds maintenance). A late March survey indicated that 84% of Southern California golf courses had closed (per The San Diego Union Tribune). Some public and 'for profit' courses are still trying to operate and some private clubs are letting members play the course walking and carrying their bag with no staff on site. But as we hit the peak playing months of the year (May to August), rounds will clearly be down significantly, which will pressure sales of balls, gloves and other accessories, and the continued closure of golf clubhouses and golf shops means there will be near zero equipment sales for months. Even if we are ‘back up and running’ in the summer, months of the season will be lost, leading consumer to push off the new equipment purchases to next year.
After all of the Covid-19 risks play out, you still have a high priced discretionary industry in the middle of a US recession/depression. Having worked in golf facilities throughout the entire 2008 financial crisis, I’ve seen first hand what plunging markets and recessions do to the golf economy. Golf was just starting to stabilize from the impacts of 2008/09. This COVID depression/recession will send another secular shock to the industry meaning lost players, lost businesses, and lost courses, and therefore lost long term equipment demand.
The current expectation for GOLF’s sales in 2020 is down 1.3%. And EPS down 12%. With the US at 51% of sales, EMEA at 13%, and Japan at 12%, those sales and earnings expectations are wildly off from what will be reality. As a reference in 2009 ELY sales were down 15%, EBIT was down 125%.
Perhaps even more surprising than the wrong expectations, is the fact that the company is trading at 18x that wrong EPS number, and 10.5x EBITDA.
We’d argue a more appropriate valuation is a mid-teens multiple on earnings down at least 50% YY. That’s a $12 stock (or lower) with the current price at $26. The company has a $350mm in Term Loan due in 2024, and the company drew $200mm on its credit facility last week.
That kind of earnings downside with some leverage at this kind of multiple is a clear Best Idea Short.
Due to the cap size and liquidity limitations of this name, we do not intend to do a deep dive black book. If you have questions or thoughts feel free to reach out directly.
As for our take on ELY, with the recent run up from the bottom we are switching it from the long bias to the short bias list. We are unlikely to make a higher conviction call on ELY long or short until there is more clarity on the health of TopGolf and whether that IPO will ever happen. Prior to Covid-19 there was arguably $4-$5 per share in ELY stock from its stake in TopGolf.
