Is It Time to Buy Golf Stocks?

In this podcast, Motley Fool senior analyst Jason Moser discusses:

• E.U. regulators approving Microsoft's deal to buy Activision Blizzard (but investors being skeptical).
• Peloton recalling more than 2 million exercise bikes.
• Why he's keeping a close eye on Home Depot's earnings report.

Motley Fool analyst Nick Sciple joins Jason to discuss the business of golf and analyze two publicly traded golf companies.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on May 15, 2023.

Chris Hill: Grab your clubs, we're heading to Bushwood for a closer look at the business of golf. Motley Fool Money starts now. I'm Chris Hill joining me today, Motley Fool Senior Analyst Jason Moser. Good to see you.

Jason Moser: Hey, good to see you. Happy Monday.

Chris Hill: Happy Monday. We're going to start with some news that broke this morning. Regulators in the European Union have approved Microsoft's proposed acquisition of Activision Blizzard. They said the concessions that Microsoft have offered around Cloud gaming are enough to alleviate any antitrust concerns. I will just remind everyone that it was just last month that regulators in the UK basically said the opposite and they blocked the deal. They stand by that decision. Here in the US, the Federal Trade Commission has yet to make a formal ruling. But Jason, you look at both stocks and it looks like investors have decided they are going with the UK on this one. They don't think the deal is going through because shares of Activision Blizzard are they're up half a percent on this news.

Jason Moser: Yeah. Well, I think that's because ultimately, this has not been solved. I think the first thing that came to mind when I saw this headline, it just made me think of The Office and the episode with snip, snap, snip, snap, snip, snap. If you're a fan of The Office and you know what I'm talking about, if not, what are you doing seriously? [laughs] The UK Competition and Markets Authority from, I guess a couple of weeks ago said they opposed the deal. Now you've got the European Commission, which is the EU's Executive arms, saying that they are OK with the deal as long as certain remedies are met and primarily the remedies are what we've discussed before, is making sure that rivals have access to that content for at least 10 years. Because there's two dynamics that really come into play with this deal. You've got the Microsoft hardware side of it with Xbox and then you've got the Activision Blizzard side of it with the content. Sony's PlayStation, I think by all accounts really is the market leader on the hardware side, but it's also very understandable. Sony's concerns that listen, if you're going to take the most popular gaming content out there, Call of Duty, World of Warcraft. I think Call of Duty is really the bee's knees for most, locking that into a certain hardware environment could be scary. Now we've got this advent of Cloud gaming, which is ultimately what Microsoft is pursuing and they're making these promises that this content will be available. I guess now, we're going to have to next level shift and go to a third voter. We've got one entity saying they're OK with it. One entity saying they're not. This now boils down to the FTC, I guess and they will, I'm sure take a commentary from Sony into consideration as well, but it's not a done deal. It's not a guaranteed deal. I guess he doesn't live to fight another day.

Chris Hill: It's going to be interesting to see how hard Microsoft and Activision Blizzard, but really Microsoft fight for this at this point, because it's easy for me to imagine if the EU came down on the same side as the UK and just said, we're against this too then it's a little easier to fold your cards and say, let's just wrap this up and hand the three-billion-dollar breakup fee check to Activision Blizzard and everybody gets on with their lives. But the split vote, it makes it a little bit more interesting.

Jason Moser: It does. I do think that Microsoft is going to fight very hard for this. I think given what we saw from the [inaudible] at the UK Competition and Markets Authority when they even noted. They didn't feel that the acquisition would reduce competition in the console market, and that's one of the big concerns there is the console market. It does feel like you're starting to see this deal take shape. You're starting to see Microsoft making the necessary concessions. It's always interesting to think about things like this when you're going into an election year, which is obviously we're going into to election season year soon and everybody's got this perspective on big tech and antitrust and this is clearly one of the bigger deals we've discussed over the last several years. Again, doesn't seem like it's dead, but Microsoft still clearly has its work cut out for it.

Chris Hill: Last Friday, shares of Peloton hit an all-time low after the company announced a recall of more than two million exercise bikes that had been sold in the US starting January 2018 through, basically this month. More than five years worth of bikes sold at Peloton, Dick's Sporting Goods, Amazon. I want to be clear this is a recall that just involves bikes sold in the US, not outside this country, but I don't want to say this is the final nail on the coffin because I don't think it is, but I do think it caps what has been a breathtaking fall from grace for this business?

Jason Moser: It is just insult-added injury and definitely not what the company needed. You've got a situation here where they're already dealing with very difficult setup just from a financials perspective. The business itself isn't growing. The company finds itself in this nasty one-and-a-half billion plus net debt position in really trying to find the sustainable path forward. Clearly, the thesis has changed considerably since this thing first came public but I will say this really could be a lot worse. This could be a lot worse. Now, it's not good. You're talking about 2.2 million bikes. I've seen some estimates where they've sold in the neighborhood of two-and-a-half million bikes or so. Now I'm not really certain we can go back and double-check that. Any which way you cut it, recalling 2.2 million bikes dating back to when they started selling in January of 2018? This is a lot of bikes in the context of how many bikes they have sold. That's bad. Now the good thing is that it does seem like a fairly easy fix. They've done a good job, I think, in getting out there and communicating. They've let consumers note you need to immediately stop using this bike and you can contact Peloton for a free repair. Now this repair, it's not something where you have to ship this bike back. You don't have to take it somewhere. You don't have a technician come to your house to fix it. It's a order a free seat post that's provided by the company. It can be self-installed and that sounds like it takes care of the problem and it's definitely a problem that is growing. They've got 35 reports of the seat post breaking. They've got injuries including a fractured wrist, got lacerations, bruises. People start reading that, this stuff can really start snowballing. As bad as it is, it certainly could have been a lot worse, but not something the company really needed to deal with right now.

Chris Hill: Absolutely not. You're right. Give them credit for moving as quickly as possible to solve this and really try and lean into the customer service aspect of this business because it is a more high touch business than other basic fitness equipment that you can buy where it's just the customer relationship and once you have made the purchase, so they're doing the right thing there. But that's a lot of bikes and it just makes me wonder how much time this business has left on its own.

Jason Moser: It is a lot of bikes and it's interesting to see how recalls impact companies differently. The first thing that it has made me think of was we got a recall notice for one of our family cars, the car that my daughters drive, which is a Ford and it's done on 2015 or something like that. But with automakers, you get the recalls all the time and in most cases, I think most of the time people let them slide. They don't really mess with them because they can be a hassle. Now, if you take your car and to get serviced where you bought it at the dealership, whatever it may be. Oftentimes they'll just be like, hey, we're changing your oil, we see these outstanding recalls. We're going to fix the recall while we're at it and so that's very convenient. But most of the time, it's just not very convenient to take time out of your day running there and go do it but one of the things I found Ford did recently, they were actually offering a mobile appointment to come to where our car was so they could go ahead and fix this recall. Now, part of me wonders, does that mean this recall is a bit more serious than others? I'm not sure and I'm not going to take any chances but it is one of those things. I think that whenever you're making big equipment like this, this is just part of the deal. You have to expect this to happen and so in the case of Peloton, your wallet, bad timing, of course. It could have been a lot worse for something that is just going to be unavoidable given the nature of what they do.

Chris Hill: It's a big week for retail earnings. We've got Home Depot, Target, TJX, and Walmart that are among the big companies reporting this week. I'm curious if there's anything in particular you're going to be watching for. For me, it's Target and then their inventory management and how that's going. Hopefully, it is moving in the right direction. But what about you?

Jason Moser: I'm actually keeping an eye specifically on Big Orange Home Depot, a stock that I've recommended, a stock that I own. I think a lot of people out there know I like it. Becoming a more and more meaningful part of my dividend portion of my retirement portfolio, hopefully for obvious reasons, but did not been a great year-to-date, stock down around 9% with the S&P up around 7.5%. Granted, most of that has occurred over the last three months. We've seen a lot of consumer concerns. Obviously, bank system failures. Just questions regarding recession on the horizon. I'm not terribly surprised with the stock having a little bit of a challenging first half of the year. But in looking at their last quarter that they reported, they started that narrative of yes, we're seeing transaction normalizing, as consumer spending shifts from goods to services. 

That definitely plays out in Home Depot's numbers and not in the good way. Now, I don't think that's something that should deter investors willing to take the longer view here. Ultimately, management guided for the quarter, the guiding for the year last quarter. The guiding for this full year's earnings to actually contract by about 5%. If you extrapolate that out, you've got a company that's still going to bring in probably around $16 per share for the full year, which values these shares today at less than 20 times those full-year projections. Now, I'm not sitting here telling you that's a buy, but I think historically it's an opportunistic price for what is a very reliable business. The question is, will that guidance hold? That I don't know, but hopefully we're going to get some insight there. But we definitely saw signs last quarter that things were slowing. The business was contracting a little bit. On the flip side, it was benefiting from things like lumber prices. We saw that lumber inflation come down which played out on the revenue side in a bad way but played out on the margins side in a good way. 

I think just getting a little bit more insight as to how they see the rest of the year playing out, the state of the consumer today in relation to the [inaudible].

Chris Hill: Jason Moser, always good talking to you. Thanks for being here.

Jason Moser: Thank you.

Chris Hill: Jason is actually sticking around so he can hit the links. The sport of golf boomed during the pandemic. But it's worth asking if the industry is starting to shrink a little bit. Nick Sciple joined Jason to take a look at two publicly traded golf companies and see if either is investable. This segment was recorded last week before Topgolf Calloway came out with their first-quarter results. Shares are down about 15% since then. 

Jason Moser: First, let's step back for a second here and actually try to take a look at one of the bigger questions we always want to answer as investors is the market opportunity. What market opportunity are we looking at here? How do you view the market opportunity as it pertains to golf?

Nick Sciple: Sure. Well, golf it is big business particularly in the United States, 41.1 million Americans played golf last year. That's good for 12% of the population you would dig into that a little bit deeper. About 25 million of those played exclusively on course going out and playing on your traditional 18-hole golf. The type of golf they've been playing since the 15th century in Scotland. This is very much a [inaudible] hobby if you want to think about it that way. Another about 15.5 million of folks who played exclusively on places like Topgolf, which we're going to talk about Calloway earlier, Sim Golf, which is an emerging business and just on your traditional golf courses. When you look at over 10% of the American population participating in a past time every year, significant business. Now golf participation had been trending down, post the big Tiger boom, also post the 2008 recession. You saw a number of golf courses close, I think it was 12% decline in golf courses since that period. You've seen golf player ship start to recover beginning in 2017 and really got some gasoline port on that trend in 2020 and 2021 during the pandemic. When pastimes that you could do it inside were banned, certainly a tailwind for golf. Some of the questions today are whether that bump up in demand we saw in the pandemic will be durable or whether we see a return to a trend that we saw maybe in the early 2010s.

Jason Moser: I know I was very grateful over the last few years to have golf as an outlet because of so many things that were going on, it was really difficult to argue that you couldn't just be outside walking on a golf course, enjoying yourself and so that was a great outlet. I wonder we're not going to get into the discussion of LIV. I know that LIV Golf can be a very polarizing topics for many. I think we probably all have opinions on both sides of events there. But ultimately, the interesting point to me in regard to this recovering of player ship as we see these numbers start to improve. one of the arguments for LIV was that it's something that potentially could bring younger players into the game with its new format, with the players that are on that tour. It'll be very interesting, I think just to watch from that perspective, is LIV golf something that ultimately does bring younger players into the game? I think first and foremost, we have to see LIV actually survive and be sustainably successful and that's another question entirely. But they're certainly given their best shot. 

Nick Sciple: That's right. The way I think about LIV, whether LIV succeeds or not, it's a heck of a lot of marketing dollars being targeted at the golf demographic. Certainly, you see some success that a big event in Australia where it seems like lots of people turned out. If you look at some of the figures yet, 3.3. million new golfers in 2022, that's the largest number that we've seen since back in the Tiger era. There's some significant opportunities, international growth continuing to grow. Places like Korea and Japan also seeing a big growth in women's participation. Women were 37% of youth golfers last year. You compare that to 2010, that was in the tenor, 15% range so certainly some new audiences coming to the game.

Jason Moser: Yes. Let's dig into actually the businesses that are helping shape this space. Let's look at some of the bigger names in the space that are really, I think well-known. Size does matter in this line of work and I think it is a market where brand loyalty is certainly a factor that comes into. You've been looking at a couple of companies that I think are really important and I think for investors, they would be the obvious considerations at least. Two companies in Acushnet Holdings and Topgolf Calloway brands. Let's go ahead and start with Acushnet because by that name alone, some folks might not recognize it. But when you look under the hood, Acushnet actually holds a nice, powerful portfolio of brands.

Nick Sciple: That's right. You may not have heard of Acushnet Holdings, but you've certainly heard of some of the companies they own, that their ticker symbol gives you a signal of the industry they're in. Their ticker symbol is GOLF so it should be pretty easy to remember. But those brands are Titleist, the most dominant ball on tour. I think it's all about three-quarters of golfers on the PGA Tour use the Pro V1 or one of the Titleist line of balls. They also make Titleist clubs where their driver is the most popular driver on the tour. Titleist, apparel, things like that also control the FootJoy brand, which is the Number 1 shoe in golf. Over 50% of the players on the tour use the FootJoy shoe. Really established brands in the industry and that's a signal to the type of customer that Acushnet targets. Acushnet targets the dedicated golfer. Everybody knows a person that's like that. If they don't get their golf in that week, they are going to have a tough time and that's a very valuable customer when you look at the golfing industry and the most recent earnings call. 

They laid out this demographic data about the business. If you look at golf, 15% of players in the golfing industry play 40% of the rounds and account for 70% of the dollars spent in the golfing industry. Titleist, FootJoy, some of these brands are very much the dominant premium brands and those are the folks they target. If you look at the capital allocation strategy at Acushnet, essentially we're going to milk these brands for all we've got. Over the past five years have been significant returners of capital, have spent $317 million on share repurchases, returned another $191 million in dividends. A big part of that is the controlling shareholder. It's over 50% controlled by FILA Korea and that's been the case since going back to 2016. Those folks have driven that capital allocation strategy toward essentially return of capital to shareholders and some very targeted tuck in. This is a business very much focused on the people who are already playing golf or these dedicated players and they have the brands to do it.

Jason Moser: Well, I must admit I've played golf for most of my life and I am a Titleist loyalist. I mean, I've played Titleist golf balls for as long as I can remember. I got Titleist wedges in my bag, even have a couple of Titleist putters and FootJoy, golly, best golf shoe out there, and I won't even consider getting anything else. It speaks to the power of the brand for those folks who are dedicated to it and have played for a long time. But that's not to say that companies can come in there and steal some of that market share. But I wonder, are there any red or yellow flags with a company like Acushnet, that would give you pause or that investors should know about?

Nick Sciple: Well, so I mentioned the controlling shareholder. Anytime you see a big private equity type company controlling over 50% of the business certainly worth paying attention to, at what's going to happen. What this stake for me, actually I'm a shareholder of Acushnet, it's not something that gives me concern in this case. I mentioned the repurchase activity and the FILA Korea business is participating in those repurchases, but they are selling pro rata with the public shareholders. If you go and buy back a $100 million from folks out in the public market, they're going to buy a $100 million from FILA Korea. I don't think you see this overhang being a downward pressure on the stock. You're getting the same benefit to those repurchases as the controlling shareholder is. If you have some concern about participation in golf, particularly among established golfers that is a risk to the extent you see a slowdown in golf participation, that would hurt Acushnet. Although, I would say that they're targeting the established golfer, these are the folks that it's going to take them a little bit more to give up this hobby that I think the typical participant. Also, these folks tend to be in a more premium segment of the market. The guys that are getting custom-fit clubs of Titleist golf clubs. You are probably a little bit more insulated to economic downturns than the typical market participant out there.

Jason Moser: Chances are good. Now, next up is one, I guess it's a little bit more obvious in what this company does and the brands that it owns, Topgolf Calloway. Now, this business has morphed a bit in recent past. Nick, I was singing the praises for Titleist and FootJoy, I got to tell you, my irons are Calloway, I got Calloway irons and I have got an Odyssey putter, that's Calloway's. I got a little bit of representation on my bag of all of these companies. I think it's a company that benefits from brand loyalty as well because they make really good equipment. But again, this is a business that is more of a bit in recent past primarily because of that Topgolf part, but what is the story here with Topgolf Calloway?

Nick Sciple: Well, so I mentioned how Acushnet is certainly targeting the dedicated golfer, Topgolf Calloway, at least where they're looking for growth is really in the emerging golfer. You see that they changed their ticker symbol, used to be LLY for Eli. Calloway changed it to MODG. MODG, standing for modern golf. You mentioned that Topgolf acquisition in 2021 bought that business, essentially a merger of equals. Today, Topgolf about 40% of revenue for the Calloway business, with the remainder of revenue coming from similar golf equipment to what I laid out with Acushnet. So Calloway drivers there also involved in the golf ball business. They own Travis Matthew apparel, if you like any of those commercials that you see what the Guardians of the Galaxy guy hyping those things up. But targeting a very different segment of the market and a very different capital allocation strategy. As with Acushnet, lots of buybacks and dividends, no dividends or buybacks in the case of Topgolf Calloway brands. Because of that investment in new Topgolf locations also saw a significant increase in capital expenditure related to that. On the plus side of that, if you want to use the David Gardner Rule Breaker language. 

They own Topgolf, that is a top dog and first-mover in an important emerging industry that being this casual driver bay golfing and you're seeing some significant growth. I laid out that 15.5 million golfers last year exclusively played in these types of locations. But in exchange for that growth, you're seeing a really significant increase in capital expenditure to see the build-out of these types of locations just to give you some numbers there. CapEx for Topgolf Calloway is expected to be $255 million in 2023 up from $55 million in 2019 before that Topgolf acquisition. Certainly lots of opportunities for growth with Topgolf as you roll out locations really across the US. They really haven't really, deployed in a significant way outside of North America. Certainly, lots of growth opportunities there, however, lots of capital required to build out those locations, a much less mature industry. They haven't been playing Topgolf since the 1400s so it really some questions about how long the duration will be of this Topgolf trend as opposed to traditional golfing and much more capital requirements on the upfront. Certainly some exciting opportunities, but you got to spend some money to get there and capture them.

Jason Moser: Yeah, I got to say I like the Topgolf acquisition. Well, I was ready for it to go public. I think we're all excited to see that hit the public markets because it was a different way to invest in golf. I think Calloway very wisely decided to snap that up before it had a chance to really take off. I'm wondering, between Acushnet Holdings and Topgolf Calloway, is there one company that stands out to you over another, and if so why?

Nick Sciple: For me personally, I am more partial to the Acushnet side of things and that's because of a, the capital return opportunity. You're seeing lots of cash being pushed into buybacks and dividends as opposed to lots of capital requirements on the Topgolf Calloway side of things. Part of what's underlying that too, is that demographic figure I laid out earlier, when 15% of the participants in a business account for 70% of the spending in that business and you have captured those types of golfers, you really have the segment of the market that I think is most important. I mentioned LIV Golf as being marketing for golf as a whole that I think benefits Titleist, Calloway, lots of other participants, and sellers of golfing equipment. I think the spending that the Topgolf Calloway is doing to bring new golfers into the game through Topgolf over the long term, some of those are going to trickle through into that 15% addicted enthusiast golfer that I think Acushnet is going to benefit from. I think, Acushnet benefits from some of the trends that Calloway is helping invest in and carrying out. But as shareholders, you don't have to spend the money and you actually get that money back in the form of capital returns. I like the dominant brand in the category. I like capturing the most important segment in the category and I like the capital allocation strategy.

Jason Moser: Weird to think of golf as having switching costs there. But that dynamic exists to a degree. No question about it. Nick, before we take off here, we thought it would be fun. We both play the game. We thought it'd be fun to offer up a quick golf tip for listeners who either play the game or are thinking of picking it up. This can be taken any direction you want, Nick, but give us a golf tip that you think is going to help.

Nick Sciple: Well, I love golf, but unlike you, Jason, I would never consider myself a golf pro or someone who is any type of a good golfer. I would just say bring some refreshments for that back nine, when you start feeling frustrated and need to take the edge off, always be prepared. I was a boy scout.

Jason Moser: A little aiming fluid never hurt. I'm with you there. So I'll go a little bit on the golf side. Yeah, I do have a background. I was a club professional for many years before I started doing other things in life. I taught a lot of it and one of the drills I still like even to this day for me and for other folks, it's actually hitting balls with your feet together and I mean, your feet literally touching, like you're standing there with your feet touching, then hitting golf balls and what it does, it promotes a good turn. I think in golf you really hear a lot, turn your body. It promotes turning as opposed to laterally swaying. It promotes really good balance. The best part of this drill, you get immediate feedback and you don't need anyone else to tell you, because if you lose your balance, well, there you go. You're not turning, you're swaying and the whole idea is to turn. If you lose your balance for moving laterally, that's not good. You start with a little half swings, move on up to full swings. I think you'll be amazed at how well you can actually hit the golf ball this way. Once you've got that motion down, you just go to the driving range, hit five balls normally, hit five balls with your feet together. Just alternate back and forth. It's a great drill you can do really for the rest of your golf like to promote good balance and a good turn. That's what I got for you, Nick. Listen, this has been a lot of fun. Thanks so much for taking the time to join today.

Nick Sciple: Always happy to be here with you, Jason. 

Chris Hill: As always, people on the program may have an interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.