YETI - Ignore The Bogey On Acushnet Holdings

2023-06-14 15:13:46 ET

Summary

• Acushnet Holdings has had a rough couple of months, with shares underperforming the broader market.
• This comes at a time when fundamental strength for the company is robust and its future is looking bright.
• Shares are attractively-priced and should fare well in the long run, so investors should focus on the bigger picture.

Although I have not played a round of golf in a few years, it has always been my favorite physical activity. You can imagine, then, my joy when I'm able to write about one of the few companies that actually operates in this space. That firm happens to be Acushnet Holdings (GOLF). For those who don't know it by this rather obscure name, it is the owner of the Titleist brand, plus it also owns FootJoy, which is a performance wearables business. Over the past couple of months now, shares of the company have not performed up to the standard I would have expected. But the way I see it, this is not because of any fundamental short falling of the company. Instead, it's because the market fails to appreciate just how impressive recent results have been. When you add on top of recent fundamental performance how shares are currently priced, I do believe that the company offers investors some nice upside potential. As such, I cannot help but to rate Acushnet stock a 'buy' at this time.

A bogey… for now

The term 'bogey' Refers to a scenario where, on a single hole of golf, the participant playing said hole sinks the ball one stroke over what would have been par. Since I last wrote about Acushnet Holdings in an article published in early March of this year, I think you can make the case that, from an investment performance perspective, the result has been a solid bogey. At that time, the company had been generating strong financial results, both on its top and bottom lines. The outlook for the company was also positive and shares were attractively priced. This led me to rate the business a 'buy' to reflect my view at the time that the stock should outperform the broader market for the foreseeable future. But since the publication of that article, shares are down 1.3% compared to the 7.8% increase seen by the S&P 500.

Looking at this return disparity, you could be forgiven for thinking that the fundamental performance of Acushnet Holdings might have been lacking. But the most recent data available, which covers the first quarter of the 2023 fiscal year, shows the exact opposite. During that quarter, revenue came in at $686.3 million. That's 13.2% above the $606.1 million generated one year earlier. According to management, this increase was driven by strength across the board. Most impressive was the Titleist golf gear that the company sells. Revenue there spiked 51.9%, jumping from $44.1 million to $67 million. Of course, this is a very small portion of the company, accounting for less than 10% of sales in all. The biggest chunk of the increase in dollar terms came from Titleist golf balls. Revenue associated with them grew by 17.2%, rising from $163.8 million to $192 million.

Innovation seems to be the most likely reason why sales of the company's golf products grew so much year over year. According to management, the surge in revenue associated with its golf balls was driven by higher sales volume of its latest generation Pro V1 and Pro V1x golf balls. Golf club revenue for the company experienced growth because of greater sales volumes of its TSR drivers, fairway woods, and hybrids. And golf gear sales rose because of improvements in supply chain and fulfillment functions that had negatively impacted results in the first quarter of 2022.

It is worth mentioning that not every area experienced strong demand. Revenue growth in the US was an astounding 25.3%. By comparison, sales actually dropped by 6.8% in the EMEA (Europe, Middle East, and Africa), though this was due to a 7% hit associated with foreign currency fluctuations. Foreign currency fluctuations negatively impacted sales growth when it came to performance in other regions as well. Instead of growth coming in at 15.9% in Japan, it actually totaled only 1.3% because of foreign currency fluctuations. In South Korea, growth could have been 9.9%. But instead, it was only 3.9%. And in all other parts of the world, combined, it could have been 19.8%. But instead, it came in at a still impressive but blunted 13.6%.

On the bottom line, the company also performed quite well. Net income grew from $81 million in the first quarter of 2022 to $93.3 million the same time this year. Operating cash flow improved significantly, going from negative $164 million to negative $86.4 million. If we adjust for changes in working capital, we would have seen it improve from $103.5 million to $125.2 million. Meanwhile, EBITDA for the company expanded from $120 million to $146.8 million.

For 2023 as a whole, management has some positive expectations . For instance, revenue is anticipated to come in at between $2.325 billion and $2.375 billion. At the midpoint, that would translate to a 3.5% increase in 2022. On a constant currency basis, however, growth should be between 5% and 7.2% for the year. While this does indicate a slowdown in sales, any sort of growth in this environment should be considered a positive. When it comes to profitability, management anticipates EBITDA of between $345 million and $365 million. No estimates were given when it came to other profitability metrics. But if we assume that they will increase at the same rate that EBITDA is forecasted to, we would expect net income of $209.1 million and adjusted operating cash flow of $306.5 million.

Using these estimates, I was able to create the chart above. The chart shows how shares are priced using three different approaches. It also does pricing based on results from 2022 as well. While I would argue that the price to earnings multiple makes the company perhaps closer to fair value, the price to adjusted operating cash flow multiple and the EV to EBITDA multiple for the company suggest to me that shares are somewhat undervalued. As part of my analysis, I also compared the company to five similar firms. Though it is worth noting that only one of them focuses on the golf industry. These can be seen in the table below. Using both the price to earnings approach and the price to operating cash flow approach, two of the five companies were cheaper than Acushnet Holdings. And when it comes to the EV to EBITDA approach, only one of the firms was cheaper, while another was tied with it.

Takeaway

Based on the data that's in front of me, I would make the case that Acushnet Holdings is in pretty solid condition. The company continues to grow, though that growth will slow later this year. Shares look attractively priced on both an absolute basis and relative to similar companies. Yes, the company has underperformed the broader market over the past couple of months. But I see this as only a bump in the road. When focused on the long run, I would argue that the business is a compelling opportunity. Between all of the factors that I mentioned and the high-quality Titleist brand that it owns, I would make the case that the company definitely has some upside from here. As such, I've decided to keep it rated a 'buy' for now.

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