GOLF - Acushnet: Don't Swing On This Stock Right Now

2023-03-04 06:51:24 ET

Summary

• GOLF is a relative newcomer as a public company, but has several legacy brands and the stock has beaten the market since IPO.
• The pandemic gave the sport a nice tailwind and GOLF was a big beneficiary.
• Shares aren't egregiously overvalued but the price keeps me away from buying right now.

Acushnet Holdings Corp (GOLF) is a subsidiary of Magnus Holdings Co, which itself is a subsidiary of FILA. The company owns many of the leading brands in golf. They operate as four different segments: Titleist Golf Balls, Titleist Golf Clubs, Titleist Golf Gear, and FootJoy Golf Wear. GOLF does everything from design to manufacturing to distributing their sporting equipment. They have been public since 2016, but the brands themselves have a long history dating back to the 30s. Below is GOLF's stock price performance since IPO:

Although a relative newcomer to the public markets, the company owns several old and established brands. We can see below how their sales break down:

The golf equipment industry is estimated to grow at a 5% rate until 2030. I chose to not include DKS as a peer, but many people do see it as another way to have exposure to the equipment side of the sport, mainly via their wholly-owned Golf Galaxy.

*6-year

Capital Allocation

Let's take a look at where capital gets allocated by management, in USD millions:

Source

Long term debt is currently at $528 million, but the company has shown it can pay down debt persistently. They have the ability to address debt with the current level of profitability, so I don’t think that will be a concern.

GOLF is a very mature company, and it has gotten to this point from some key acquisitions along the way. Going forward smaller acquisitions along with an increasing dividend will be driving a lot of the returns.

Risk

There are two potential risks I see with this company. The first is execution risk. The Titleist and FootJoy brands are the crown jewels of this company. This doesn’t guarantee success though, a brand has to be managed properly in order for the company to benefit. So far I don’t see any red flags, but honestly I would need to see a few more years of operational track record in order to really give management a fair grade.

The next risk would simply be a secular decline in popularity of the sport. I’m certainly no expert on this sport, and not in a position to accurately forecast the long term growth of the sport. I can only go by the trend, and at this point I think it's safe to say the sport itself is doing fine. The pandemic gave the sport a boost and it seems to have sustained that tailwind.

Valuation

First we will look at the multiples, followed by the historical trend of the price multiples as well.

Source

There doesn’t appear to be any discount on a pricing basis. Multiples are already in the process of expanding over the past few years. This doesn’t mean there isn’t room for more, but to invest at this point would assume that an expanding multiple won’t be a major contributor to returns at all.

Below is the DCF model:

At the current price, it is slightly overvalued. My growth assumptions are based on an optimistic view of the sport. If the sport itself declines in the long run, then this model means little. At the very least I would prefer a nice margin of safety as far as price goes, just in case I’m wrong about secular growth, but you definitely won’t get that at today’s share price.

Conclusion

GOLF and MODG are the best stocks to bet on the future of golf as an industry. GOLF has tremendous brand power, and should be able to leverage that into pricing power. So far this has been well reflected in the steady gross margins.

I like GOLF as the best way to bet on the sport of golf, but the current price will be keeping me away. If the stock is undervalued, I would prefer to have that margin of safety to bail me out in case the popularity of the sport wanes over time. Since it’s not egregiously overvalued, it is worth keeping an eye on this company.

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