Callaway Is The Top Golf Brand In The World, But Has Room To Grow

Callaway Golf Co ELY is the world's most recognizable golf brand, but that doesn't necessarily make it an attractive investment with huge upside, analysts at Cowen said.

Cowen's John Kernan initiates coverage of Callaway's stock with a Market Perform rating and $14 price target as the golf business has shown moderate growth and extremely cyclical profitability. In fact, the company's operating margin peaked in fiscal 2007 at 9 percent and management's strategy of product innovation, customization and improving inventory management will only drive an operating margin expansion of 150 basis points to 7 percent in fiscal 2019.

Topgolf Exposure

Callaway owns a 15 percent stake in Topgolf, a golf concept that combines the game with entertainment, nightlife, food and alcohol. As such, exposure to the non-traditional aspect of the sport does provide Callaway's investors with a potential valuable option in Callaway's stock.

In fact, the analyst is expecting Topgolf to consist of up to 100 locations and reach $1.6 billion in peak sales versus $500 million in fiscal 2016. This would value the privately-held company as high as $4 billion, which naturally gives Callaway investors "upside potential to one of the fastest growing, experience-oriented companies in the U.S."

Bottom line, Callaway's stock is already trading at a nine-year high and up 16 percent in 2017 alone. A $14 price target implies a 32x P/E multiple and 14x EV/EBITDA, which compares to the current stock price that trades at a 30x P/E multiple and 13x EV/EBITDA multiple.

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