Callaway Presentation
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Transcript of Callaway Presentation
CFA Ins(tute Research Challenge 2013-‐2014 San Diego State University
Summary Compe((ve Posi(oning Financials Valua(on Risk Analysis Conclusion
Investment Summary
Investment Highlights • (+) New management’s cost ini(a(ves • (+) Focus on core competencies • (+/-‐) High degree of opera(ng leverage • (-‐) High end market risk
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1/1/09 7/1/09 1/1/10 7/1/10 1/1/11 7/1/11 1/1/12 7/1/12 1/1/13 7/1/13 1/1/14
Closing Price Current Price Target Price
7.11% upside
Recommenda(on: HOLD
Target Price: $9.79
Market Price: $9.14
As of 1/21/14
March 2012: Chip Brewer becomes CEO
July 2012: Cost Ini@a@ves announced
12-‐month target
Summary Compe((ve Posi(oning Financials Valua(on Risk Analysis Conclusion
Company Overview
1982: Callaway founded in Carlsbad, CA
1992: IPO on New York Stock Exchange (NYSE: ELY)
1998: Stock price drops from $31 to $9
2012: Chip Brewer named CEO
Drivers and fairway woods
24%
Irons 20%
PuGers 11%
Golf balls 17%
Accessories and other
28%
Product PorLolio
US 49%
Europe 15%
Japan 18%
Rest of Asia 9%
Other 9%
Global Sales
COMPETITIVE POSITIONING Industry Overview, Compe(tor Rivalry, & Compe((ve Floor Analysis
Summary Compe((ve Posi(oning Financials Valua(on Risk Analysis Conclusion
Industry Overview
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Threat of New Entrants
Threat of Subs(tute Products
Bargaining Power of Customers
Bargaining Power of Suppliers
Compe((ve Rivalry within the Industry
Porter's Five Forces
Key characteris@cs: • High entry barriers • Luxury goods market • Specialized manufacturing
processes • Highly saturated market
Spor@ng Good Industry CAGR: 4.0% Golf Segment CAGR: 2.4%
5 = most favorable to the company 1 = least favorable to the company
Summary Compe((ve Posi(oning Financials Valua(on Risk Analysis Conclusion
Compe@@ve Rivalry
18.7% 19.1% 18.7% 19.6%
17.5% 17.6% 17.3%
15.1% 13.9%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
2004 2005 2006 2007 2008 2009 2010 2011 2012
Callaway’s U.S. Market Share (Hard goods)
Summary Compe((ve Posi(oning Financials Valua(on Risk Analysis Conclusion
Compe@@ve Advantage
Compe((ve Posi(oning
• Semi-‐annual product release • Improving brand image • Increased profit margin
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-‐0.05
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0.05
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0.15
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0.25
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0 0.5 1 1.5 2 2.5 3
Profi
t Margin
Asset Turnover
ROA & Compe@@ve Advantage
Industry Average
FINANCIALS Core Competency Sales, Cost Ini(a(ves & Earnings
Core Competencies
Summary Compe((ve Posi(oning Financials Valua(on Risk Analysis Conclusion
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-‐15.00%
-‐10.00%
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0.00%
5.00%
10.00%
15.00%
20.00%
2008 2009 2010 2011 2012 2013
YOY Sales Growth Core Products
Accessories
Cost Ini@a@ves
Summary Compe((ve Posi(oning Financials Valua(on Risk Analysis Conclusion
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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E
COGS
OPEX
$60 million annual savings = $19 million COGS + $41 million OPEX
Profit Margin
Summary Compe((ve Posi(oning Financials Valua(on Risk Analysis Conclusion
-‐25%
-‐20%
-‐15%
-‐10%
-‐5%
0%
5%
10%
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-‐200
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2010 2011 2012 2013E 2014E
Revenues Net Income Profit Margin
• Lower inventory • Higher asset-‐turnover
• Results in increased: • Revenue • Profit margin • Net income
VALUATION Mul(ples Pricing & DCF Valua(on
Summary Compe((ve Posi(oning Financials Valua(on Risk Analysis Conclusion
Mul@ples Pricing
Peer Group Selec(on Criteria: • Luxury goods as primary source of
revenues • Small Cap Companies • Comparable Financial Ra(os
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0.50
1.00
1.50
SWHC NLS DKS BC LF
2014 Es@mate
Peer Group EV/Sales
Mul@plier EV/Sales
Forecasted Year
Mul(ple (Median)
Enterprise Value
Equity Value
2013E 2014E
1.14x 1.1x
$957.2 $1014.1
$887.5 $944.4
2014 Target Price $10.31
Mul@ples Pricing
0.00%
20.00%
40.00%
60.00%
NLS LF ELY SWHC DKS BC
Profitability 10 Year Median
Gross Margin Opera(ng Margin
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ELY DKS LF BC SWHC NLS
Performance 10 Year Average
Asset Turnover Inventory Turnover
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DKS BC NLS SWHC ELY LF
Liquidity 10 Year Average
Quick Ra(o Current Ra(o
Summary Compe((ve Posi(oning Financials Valua(on Risk Analysis Conclusion
• Gross margins typical of consumer discre(onary sector
• Low asset turnovers across industry • Strong liquidity among peers
DCF Assump@ons
ELY
Mean Peer Unlevered Beta 1.17
Debt / Equity 31.30%
Target Marginal Tax Rate 38.50%
Re-‐levered Beta 1.40
Summary Compe((ve Posi(oning Financials Valua(on Risk Analysis Conclusion
Cost of Debt Cost of Debt 3.75% Tax Rate 38.50% Aher-‐tax Cost of Debt 2.31%
Cost of Equity Risk-‐free Rate 2.83% Market Risk Premium 7.75% Levered Beta 1.40 Cost of Equity 13.68%
WACC 10.97% -‐5 -‐4 -‐3 -‐2 -‐1 0 1 2 3 4 5
Degree of Opera@ng Leverage
Key Drivers • (+) Semi-‐annual product releases • (+) Chip Brewer’s proven leadership • (+/-‐) High degree of opera(ng
leverage • (-‐) Market sensi(vity
Target Price
$9.57 USD
$10.31 USD
$9.79 USD
30% Mul@ples Valua@on
70% DCF Valua@on
2014 Year End Target Price Upside: 7.11%
Holding Period Return: 7.22%
Summary Compe((ve Posi(oning Financials Valua(on Risk Analysis Conclusion
RISK ANALYSIS Opera(onal, Financial, Poli(cal & Market
Summary Compe((ve Posi(oning Financials Valua(on Risk Analysis Conclusion
Risk Analysis
Significant
Losing Exis(ng Suppliers
Limited Growth
Opportunity Mod
erate
Conflict Minerals
Market Demand
Exchange Rate Risk
Minor
Input Price Fluctua(on Seasonality
Low Medium High
IMPACT
PROBABILITY
Summary Compe((ve Posi(oning Financials Valua(on Risk Analysis Conclusion
Risk Analysis
Significant
Losing Exis(ng Suppliers
Limited Growth
Opportunity Mod
erate
Conflict Minerals
Market Demand
Exchange Rate Risk
Minor
Input Price Fluctua(on Seasonality
Low Medium High
IMPACT
PROBABILITY
Summary Compe((ve Posi(oning Financials Valua(on Risk Analysis Conclusion
Risk Analysis
Significant
Losing Exis(ng Suppliers
Limited Growth
Opportunity Mod
erate
Conflict Minerals
Market Demand
Exchange Rate Risk
Minor
Input Price Fluctua(on Seasonality
Low Medium High
IMPACT
PROBABILITY
Summary Compe((ve Posi(oning Financials Valua(on Risk Analysis Conclusion
Risk Analysis
Significant
Losing Exis(ng Suppliers
Limited Growth
Opportunity Mod
erate
Conflict Minerals
Market Demand
Exchange Rate Risk
Minor
Input Price Fluctua(on Seasonality
Low Medium High
IMPACT
PROBABILITY
CONCLUSION Hold Recommenda(on
Summary Compe((ve Posi(oning
Financials & Valua(on Risk Analysis Conclusion
Conclusion
Hold
(+) New management’s cost ini(a(ves
(+) Core competency
focus
(+/-‐) High degree of opera(ng leverage
(-‐) High market risk
Summary Compe((ve Posi(oning
Financials & Valua(on Risk Analysis Conclusion
Ques@ons?
Q & A
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