CFA

Ins(tute Research Challenge 2013-2014

San Diego State University

Investment Summary

Investment Highlights

(+) New managements cost ini(a(ves

(+) Focus on core competencies
(+/-) High degree of opera(ng leverage
(-) High end market risk

Recommenda(on: HOLD
Target Price:
$9.79
12-month target

Market
Price:
$9.14
As of 1/21/14

10

7.11%
upside

March 2012: Chip

Brewer becomes CEO

8
7

Closing Price
Current Price
Target Price

6
5
4
1/1/09

July 2012: Cost

Ini@a@ves announced
7/1/09

Summary

1/1/10

7/1/10

Compe((ve
Posi(oning

1/1/11

7/1/11

Financials

1/1/12

7/1/12

Valua(on

1/1/13

7/1/13

Risk Analysis

1/1/14

Conclusion

Company Overview
1982: Callaway founded
in Carlsbad, CA

1998: Stock price

drops from $31 to $9

1992: IPO on New York Stock

Exchange (NYSE: ELY)

2012: Chip Brewer

named CEO

Global Sales

Rest of
Asia
9%

Product PorLolio

Other
9%

Drivers and
fairway woods
24%

Accessories
and other
28%

US
49%

Japan
18%

Irons
20%

Golf balls
17%
Europe
15%

Summary

PuGers
11%

Compe((ve
Posi(oning

Financials

Valua(on

Risk Analysis

Conclusion

Industry Overview, Compe(tor Rivalry, & Compe((ve Floor Analysis

COMPETITIVE POSITIONING

Industry Overview

Porter's Five Forces

Threat of New
Entrants

Key characteris@cs:

High entry barriers
Luxury goods market
Specialized manufacturing
processes
Highly saturated market

4
3

Compe((ve Rivalry
within the Industry

Compe((ve
Posi(oning

1
0

Spor@ng Good Industry CAGR: 4.0%

Golf Segment CAGR: 2.4%

Summary

Threat of Subs(tute
Products

Bargaining Power of
Suppliers

Financials

Bargaining Power of
Customers

5 = most favorable to the company

1 = least favorable to the company

Valua(on

Risk Analysis

Conclusion

Compe@@ve Rivalry
Callaways U.S. Market Share (Hard goods)
25.0%

20.0%

19.6%
18.7% 19.1% 18.7%

17.5% 17.6% 17.3%

15.1%

15.0%

13.9%

10.0%

5.0%

0.0%
2004

Summary

Compe((ve
Posi(oning

2005

Financials

2006

2007

2008

Valua(on

2009

2010

Risk Analysis

2011

2012

Conclusion

Compe@@ve Advantage

0.3

ROA & Compe@@ve Advantage

0.25

Compe((ve Posi(oning

Semi-annual product release

Improving brand image
Increased prot margin

Prot Margin

0.2
0.15
0.1

Industry Average

0.05
0
0

0.5

1.5

2.5

-0.05
-0.1

Summary

Asset Turnover

Compe((ve
Posi(oning

Financials

Valua(on

Risk Analysis

Conclusion

Core Competency Sales, Cost Ini(a(ves & Earnings

FINANCIALS

Core Competencies
YOY Sales Growth

Core Products

20.00%

Accessories

15.00%
10.00%
5.00%
0.00%
-5.00%
-10.00%
-15.00%
-20.00%
-25.00%
2008

Summary

2009

Compe((ve
Posi(oning

2010

Financials

2011

2012

Valua(on

2013

Risk Analysis

Conclusion

Cost Ini@a@ves

700
600
500
400

COGS

300

OPEX

200
100
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E

$60 million annual savings = $19 million COGS + $41 million OPEX

Summary

Compe((ve
Posi(oning

Financials

Valua(on

Risk Analysis

Conclusion

Prot Margin

Revenues

Net Income

Prot Margin

1200

10%

1000

5%

800

0%

600

Lower inventory
Higher asset-turnover

-5%
400
-10%
200
-15%

0
2010

2011

2012

2013E

2014E

-200

-20%

-400

-25%

Summary

Compe((ve
Posi(oning

Financials

Valua(on

Results in increased:
Revenue
Prot margin
Net income

Risk Analysis

Conclusion

Mul(ples Pricing & DCF Valua(on

VALUATION

Mul@ples Pricing

2014 Es@mate

Peer Group Selec(on Criteria:

Luxury goods as primary source of
revenues
Small Cap Companies
Comparable Financial Ra(os

Peer Group EV/Sales

1.50
1.00
0.50
0.00

SWHC NLS
Mul@plier

DKS

BC

LF

EV/Sales

Forecasted Year

2013E

2014E

Mul(ple (Median)

1.14x

1.1x

Enterprise Value

$957.2

$1014.1

Equity Value

$887.5

$944.4

2014 Target Price $10.31

Summary

Compe((ve
Posi(oning

Financials

Valua(on

Risk Analysis

Conclusion

Mul@ples Pricing
Protability
10 Year Median

Performance
10 Year Average

60.00%

40.00%

20.00%

0.00%

NLS

LF

ELY SWHC DKS

Gross Margin

BC

Opera(ng Margin

Liquidity
10 Year Average

ELY

DKS

LF

Asset Turnover

BC SWHC NLS
Inventory Turnover

Gross margins typical of consumer

discre(onary sector
Low asset turnovers across industry
Strong liquidity among peers

4
3
2
1
0

DKS

BC NLS SWHC ELY

LF
Quick Ra(o
Current Ra(o

Summary

Compe((ve
Posi(oning

Financials

Valua(on

Risk Analysis

Conclusion

DCF Assump@ons

Key Drivers

(+) Semi-annual product releases

(+) Chip Brewers proven leadership
(+/-) High degree of opera(ng
leverage
(-) Market sensi(vity

ELY
Mean Peer Unlevered Beta

1.17

Debt / Equity

31.30%

Target Marginal Tax Rate

38.50%

Re-levered Beta

1.40

Degree of Opera@ng Leverage

5
4
3
2
1
0
-1
-2
-3
-4
-5

Summary

Cost of Debt
Cost of Debt
Tax Rate
Aher-tax Cost of Debt
Cost of Equity
Risk-free Rate
Market Risk Premium
Levered Beta
Cost of Equity
WACC 10.97%

Compe((ve
Posi(oning

Financials

Valua(on

Risk Analysis

3.75%
38.50%
2.31%
2.83%
7.75%
1.40
13.68%

Conclusion

Target Price

70% DCF Valua@on

$9.57 USD
$10.31 USD
30% Mul@ples Valua@on

Summary

Compe((ve
Posi(oning

Financials

$9.79
USD
2014 Year End Target Price
Upside: 7.11%
Holding Period Return: 7.22%

Valua(on

Risk Analysis

Conclusion

Opera(onal, Financial, Poli(cal & Market

RISK ANALYSIS

Losing Exis(ng
Suppliers

Limited
Growth
Opportunity

Conict
Minerals

Market
Demand

Exchange Rate
Risk

Input Price
Fluctua(on

Seasonality

Medium

High

Minor

IMPACT

Moderate Signicant

Risk Analysis

Low

PROBABILITY
Summary

Compe((ve
Posi(oning

Financials

Valua(on

Risk Analysis

Conclusion

Losing Exis(ng
Suppliers

Limited
Growth
Opportunity

Conict
Minerals

Market
Demand

Exchange Rate
Risk

Input Price
Fluctua(on

Seasonality

Medium

High

Minor

IMPACT

Moderate Signicant

Risk Analysis

Low

PROBABILITY
Summary

Compe((ve
Posi(oning

Financials

Valua(on

Risk Analysis

Conclusion

Losing Exis(ng
Suppliers

Limited
Growth
Opportunity

Conict
Minerals

Market
Demand

Exchange Rate
Risk

Input Price
Fluctua(on

Seasonality

Medium

High

Minor

IMPACT

Moderate Signicant

Risk Analysis

Low

PROBABILITY
Summary

Compe((ve
Posi(oning

Financials

Valua(on

Risk Analysis

Conclusion

Losing Exis(ng
Suppliers

Limited
Growth
Opportunity

Conict
Minerals

Market
Demand

Exchange Rate
Risk

Input Price
Fluctua(on

Seasonality

Medium

High

Minor

IMPACT

Moderate Signicant

Risk Analysis

Low

PROBABILITY
Summary

Compe((ve
Posi(oning

Financials

Valua(on

Risk Analysis

Conclusion

Hold Recommenda(on

CONCLUSION

Conclusion

(+) Core
competency
focus

(+) New
managements
cost ini(a(ves

Summary

Compe((ve
Posi(oning

(+/-) High degree

of opera(ng
leverage

(-) High market

risk

Hold
Financials &
Valua(on

Risk Analysis

Conclusion

Ques@ons?

Q & A

Summary

Compe((ve
Posi(oning

Financials &
Valua(on

Risk Analysis

Conclusion

Links