D Lentz
Acushnet Holdings Inc. (NYSE: Golf) may not be a household name, although anyone with casual exposure to the game of golf will be familiar with the company’s flagship brand, “Titleist.”In fact, the company is a giant in the sport Its portfolio of bats, balls and accessories is a frequent favourite. elite player Same with weekend warriors.
The appeal here is that golf has seen something of a renaissance in recent years, with data showing a growing number of golfers leading to a boom in the industry. Acushnet capitalized on this momentum, generating record sales and earnings.
The stock is up 35% year-to-date on the back of impressive operating and financial execution. We like Golf, which is well-positioned to go higher thanks to its solid fundamentals and positive long-term outlook.
Golf’s Q2 Earnings Review
The company reported second-quarter GAAP EPS of $1.09, up 20% year-over-year and also beating consensus estimates by $0.16. Revenue for the quarter came in at $689 million, up 5% from a year earlier and also beating expectations.
A major financial theme is the trend towards firming profit margins. Gross margin rose to 53.5% from 52.2% in the second quarter of 2022, reflecting higher average selling prices and strong customer response to new products.
Reduced cost pressures and easing supply chain disruptions in 2022 are also contributing factors. SG&A decreased as a percentage of revenue, following efforts to implement cost savings and efficiency measures over the past year.
The result was a 24% year-over-year increase in baseline adjusted EBITDA revenue and an adjusted EBITDA margin of 19.2%, a sharp rebound from 16.2% in the second quarter of 2022.
Source: Company IR
On the operational front, some standout metrics include strong sales of Titleist golf balls, which grew 19.8% year-over-year globally in constant currency. Titleist golf clubs, the group’s second-largest segment, also posted strong growth of 16.3%. Those areas compensated for some weakness at the “FootJoy” golf apparel brand, where sales fell 9.5% and management said the product cycle was over before new styles were introduced in the third quarter.
By region, the US has been the growth driver, with sales up 14.2%. While traditionally important markets for the company, such as South Korea, Japan and EMEA, have seen some softening trends this year, momentum has picked up in the “rest of the world” in response to an ongoing international expansion strategy.
Source: Company IR
On the guidance front, Acushnet raised its forecast for revenue and earnings. Management now expects full-year net sales to grow between 5% and 7.2% in constant currency compared with 2022. The midpoint of the adjusted EBITDA target is $365 million, up 8% year-over-year. The tone of the earnings call showed optimism about second-half trends and looking ahead to new product launches.
Finally, we would like to point out that the company ended the quarter with $61 million in cash against a total debt position of $682 million. Considering the trend of adjusted EBITDA, we believe a net leverage ratio of around 1.7x is a stable level and represents a strength of the company’s investment profile.
Acushnet pays a quarterly dividend of $0.195 per share, which we believe is well supported by underlying cash flow, with an earnings payout ratio of about 25%. While the dividend yield is just 1.4%, the company is also aggressive in share repurchases, repurchasing $140 million of shares this year, leaving $267 million remaining in existing authorizations.
Golf share price forecast
We mentioned that interest in golf has been on the rise in recent years. The trend likely started during the pandemic, with people looking to the outdoors to stay active.
The good news is that the trend is still positive. Year-to-date, June is up 5.5 percent, according to the independent National Golf Foundation, a measure of participants tracked by the National Golf Clubs Network.
The setup has been a powerful boost for Acushnet as the target market of U.S. golfers expands and the trend spreads internationally. Simply put, more golfers drive demand for related equipment, and the Titleist brand will be a good choice for many consumers.
Source: National Golf Foundation
Golf is expected to earn $3.01 per share this year, up 10% from 2022, according to consensus forecasts. The market currently expects this growth rate to slow to 3% in 2024, and while we think this forecast is too low, the bullish case is that the stock indicates that the company is beating expectations.
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Wall Street analysts at Jefferies Financial Group (JEF) recently upgraded the stock, citing some of these same trends as well as Acushnet’s growing market share. The same article also makes a good point that the aging population dynamics in the US should be the long-term runway for the sport as athletes age and have time to compete more. We agree with that and see Golf as a big winner in the industry.
Is golf underrated?
The insight we offer is that GOLF stands out among other “golf stocks” like Topgolf Callaway Brands Corp (MODG) and even Nike, Inc. (NKE), which sells golf equipment, as more are purely entering the space. MODG. For example, maintaining a portfolio of non-golf apparel brands and investing in some experimental concepts such as “Top Golf” entertainment, which has a separate business model and unique economics outside of sporting goods.
In our view, Acushnet is more focused on traditional sports and has the flexibility to better respond to potentially changing industry trends. We bring this up because, while GOLF currently has higher margins, the stock trades at 19 times forward earnings at a discount to MODG of nearly 26 times. Golf also has the advantage of offering a dividend yield. Overall, we believe Golf is undervalued.
Source: yCharts
Golf share price forecast
We rate GOLF a Buy with a one-year price target of $74, implying a price tag of 25 times the current consensus 2023 EPS. The company’s high valuation premium is justified, in our view, given its status as a premium brand and setting standards across multiple product categories. Continued growth in global golf could open the door to higher earnings as the company consolidates its market share.
In terms of risks, despite the positive backdrop, Acushnet is exposed to global macro conditions. Potentially worsening global economic growth and a sharp slowdown in consumer spending could weigh on demand for the company’s products and spark renewed volatility. Points to monitor for the stock in the coming quarters include the evolution of EBITDA margins and sales trends in key regions.
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