Analyst: Buy-Side Investors Aren't Fully Onboard With Callaway's Jack Wolfskin Acquisition

Callaway Golf Co ELY shares were falling more than 5 percent Thursday despite the golf equipment maker's fourth-quarter earnings and sales beat the previous day. 

The company reported weak first-quarter and FY19 earnings guidance, likely sending shares lower.

RayJay Stays Neutral 

Callaway delivered an impressive 2018 despite a soft Q4, and its profitability in 2019 will be back-loaded after the shift of new product launches to the second half, Raymond James analyst Dan Wewar said in a Wednesday note. 

The analyst reiterated a Market Perform rating on Callaway. 

“Softer-than-expected 4Q18 sales/earnings results, combined with initial guidance for 1H19 that falls short of expectations, reinforces our neutral stance on ELY," Wewar said. "In addition, feedback from the buy-side suggests that investors are not yet fully onboard with Callaway’s decision to acquire the Jack Wolfskin apparel/footwear brand." 

The Jack Wolfskin acquisition, the largest in company history, was not particularly well-received by investors, with Callaway shares falling nearly 15 percent following the announcement.

“It is our opinion that most investors have not yet embraced Callaway’s decision to purchase Jack Wolfskin. Most U.S. investors are unfamiliar with the brand, and given the brand has been owned by private investors, there are not any publicly available financial results to study," the analyst said. 

Cowen Forecasts Tough 2019 

Cowen analyst John Kernan also reiterated a Market Perform rating on Callaway and lowered the price target from $24 to $18 due to moderation in the category and macro trends.

The Epic Flash woods and Apex irons brands represent compelling innovation and could render guidance conservative, the analyst said.

Last year was a perfect storm for Callaway in which the company outperformed across its businesses, FX was a tailwind and U.S. and Asia golf markets were favorable, driving significant upside to initial guidance, Kernan said. 2019 is expected to be a much tougher year for the company, he said. 

“[The first half] will reflect lapping a heavier launch cadence in 1H LY, the timing of investments, acquisition integration, an FX drag and JW losing money in the 1H due to seasonality of its model." 

The analyst did estimate that TopGolf, a notable Callaway investment, is worth approximately $6 billion as a standalone business. Callaway owns a 15-percent stake in the company.

Callaway shares were down 5.72 percent at $15.49 at the time of publication Thursday. 

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Photo courtesy of Callaway.