Callaway Golf Downgraded Amid Product Competition From Top Brands

Callaway Golf Co ELY shares have gained over 40 percent over the past year amid a resurgence in golf's popularity and some keen investments and acquisitions.

Despite Callaway’s recent success, it was hit with a downgrade from D.A. Davidson on Wednesday on the firm's view that market share gains will hard to come by in 2018.

The Analyst

D.A. Davidson analyst Andrew Burns downgraded Callaway from Buy to Neutral and reiterated a $19 price target.

The Thesis

The golf industry backdrop is "healthy," and that means a more competitive environment is emerging among the golf brands, Burns said in the downgrade note. (See the analyst's track record here.) 

When Nike Inc NKE exited the golf equipment business, and subsequently adidas AG (ADR) ADDYY sold off its golf equipment segment — including TaylorMade — Callaway was a main beneficiary of an industry in a state of flux. Now that the sector is normalizing, market share won’t be as easy to come by for Callaway, Burns said. 

Early season channel checks were positive around Callaway’s product lineup, including The Rogue golf club, but the analyst said he's also seeing excitement around Acushnet Holdings Corp GOLF's Titleist AP3 irons and AVX golf ball launch; TaylorMade’s M3/M4 Twist Face; and Ping’s G400 Driver. This is a notable change from last year, when Callaway's EPIC line was the clear standout at the 2017 PGA show, Burns said. 

Golf Datatech reports that rounds year-to-date were down 7.2 percent through February, likely due to late winter weather, according to D.A. Davidson.

While this limits Callaway’s upside, Burns forecast first-quarter earnings results in-line with estimates, given the company’s strong product lineup and favorable pricing mix. D.A. Davidson is modeling 20-percent sales growth in Q1 and revenue of $370.7 million.

Price Action

Callaway shares were down more than 7 percent near the end of Wednesday's trading session at $16.44. 

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