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By Rick Aristotle Munarriz (TMF Edible)
February 5, 2001

Callaway Golf Co.

Ticker: (NYSE: ELY)
Phone: 760-931-1771
Website: http://www.callawaygolf.com/
Price (2/2/01): $21.72

How Did It Double?

There was a time when Big Bertha was fit for feeding. From 1992 to 1997, Callaway Golf's innovative oversized driver helped take the company's revenues from $132 million to $843 million. Earnings during the same period skyrocketed from $0.32 to $1.85 per share.

But no revolutionary product goes uncloned. Competition took the "bigger is better" mantra to heart. When Callaway went on to introduce titanium as a club enhancer, others followed.

Tiger Woods blazed onto the scene, breathing young popularity into an old sport, but Callaway wasn't able to capitalize on the game's rejuvenation. The company misfired and landed in the rough.

But while Callaway was struggling it still had the elite brand. It would go on to expand its product lines -- beyond drivers and clubs to golf balls and apparel. With founder Ely Callaway back at the helm, the company started to prosper with fatter margins and restored optimism.

Ely took the company out of the rough -- and landed investors on the green.

Business Description

California-based Callaway Golf makes and sells golf equipment. The colorful Ely Callaway was so impressed when he came across the early version of the Big Bertha back in 1991 that he bought the company. Never short on ego, he named the company after himself. The ticker symbol bears his first name.

Callaway went on to introduce new drivers, clubs and putters -- including its top-selling Big Bertha Hawk Eye VFT Titanium Drivers and Fairway Woods.

Financial Facts

Income Statement 
12-month sales:       $840.4 million 
12-month income:       $83.0 million
12-month EPS:           $1.16
Profit Margin:           9.9%
Market Cap:          $1526.9 million

Balance Sheet  
Cash:                 $102.6 million
Current Assets:       $344.5 million
Current Liabilities:  $109.3 million
Long-term Debt            N/A

Ratios
Price-to-earnings:  18.7
Price-to-sales:      1.8

How Could You Have Found This Double?

Back in 1998, when we gave Callaway the Daily Trouble treatment, everything was falling apart. El Niño was keeping golfers off the courses. Asia was going through a currency crunch just as the company was counting on the Far East to drive home sales growth that a maturing domestic market could not.

Sales tanked in 1998 and didn't get much better a year later. However, revenues shot up 17% last year to $840 million -- nearly where it was back in 1997. More importantly from an operations side, profits soared 50% in 2000.

The key to Callaway's rebirth has come mostly through international growth, where sales last year jumped 29% over just a 9% spurt stateside. The momentum overseas is building -- the company had a stunning 54% spike in revenues abroad last quarter.

The Asian Flu wasn't going to last forever. Meanwhile, the company was chipping away at replacing international distributorships with the direct sales model that had served the company well domestically early in its growth cycle.

Callaway was charging ahead in all facets of its game and that was a lot better than par for the course.

Where to From Here?

Will the consumer pay up for premium-priced golf balls? They have. The Rule 35 balls aren't cheap and -- if it pans out -- will be a great way for Callaway to carve a niche where the replacements run far higher than a metal woods heirloom. However, the company lost $46 million last year in entering the golf-ball market. The upside is that negative gross margins finally turned positive for the December quarter.

The company's outlook is pretty good for the year ahead. Revenues should continue to climb -- to $900 million. Gross margins will go from 44% to 50%, mostly due to improvements in its golf-ball operations.

Callaway is also projecting profits to come in between $1.51 and $1.56 a share. That's healthy 30-35% bottom-line growth and represents a return to prized double-digit net margins.

If those numbers hold up, Callaway will probably continue its winning ways. It's currently trading at an earnings multiple of just 13 to14 times this year's earning expectations. However, more powerful than El Niño is El Dinero. If the economy does continue to slide the demand for pricey golf gear will be far from a consumer priority. If Callaway is set to improve its golf score in the year ahead it better hope the economy is solid -- not with a hole in one.

Even though Rick Aristotle Munarriz lives in Coral Gables, Florida -- within walking distance of three world class golf courses -- he has yet to take to the game. He also hasn't taken to owning shares of Callaway Golf. Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.

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