CFA

Ins(tute Research Challenge 2013-2014

San Diego State University

 Investment Summary

Investment Highlights
(+) New managements cost ini(a(ves
Recommenda(on: HOLD
(+) Focus on core competencies
(+/-) High degree of opera(ng leverage Target Price: Market
$9.79 Price: $9.14
(-) High end market risk 12-month target As of 1/21/14

10
7.11%
9 upside

8 March 2012: Chip

Brewer becomes CEO
7
Closing Price
6 Current Price
Target Price
5 July 2012: Cost
Ini@a@ves announced
4
1/1/09 7/1/09 1/1/10 7/1/10 1/1/11 7/1/11 1/1/12 7/1/12 1/1/13 7/1/13 1/1/14

Compe((ve
Summary Financials Valua(on Risk Analysis Conclusion
Posi(oning
 Company Overview

1982: Callaway founded 1998: Stock price

in Carlsbad, CA drops from $31 to $9

1992: IPO on New York Stock 2012: Chip Brewer

Exchange (NYSE: ELY) named CEO

Global Sales Product PorLolio

Other Drivers and
Rest of 9% Accessories fairway woods
Asia and other 24%
9% 28%

US
Japan 49%
18%
Irons
Golf balls 20%
17%
Europe PuGers
15% 11%

Compe((ve
Summary Financials Valua(on Risk Analysis Conclusion
Posi(oning
Industry Overview, Compe(tor Rivalry, & Compe((ve Floor Analysis

COMPETITIVE POSITIONING
 Industry Overview

Porter's Five Forces

Threat of New
Key characteris@cs: Entrants
5

4
High entry barriers
3
Luxury goods market
Compe((ve Rivalry 2 Threat of Subs(tute
Specialized manufacturing within the Industry 1 Products
processes 0
Highly saturated market

Spor@ng Good Industry CAGR: 4.0% Bargaining Power of Bargaining Power of
Suppliers Customers

Golf Segment CAGR: 2.4%
5 = most favorable to the company
1 = least favorable to the company

Compe((ve
Summary Financials Valua(on Risk Analysis Conclusion
Posi(oning
 Compe@@ve Rivalry

Callaways U.S. Market Share (Hard goods)

25.0%

19.6%
20.0% 18.7% 19.1% 18.7%
17.5% 17.6% 17.3%
15.1%
15.0% 13.9%

10.0%

5.0%

0.0%
2004 2005 2006 2007 2008 2009 2010 2011 2012

Compe((ve
Summary Financials Valua(on Risk Analysis Conclusion
Posi(oning
 Compe@@ve Advantage

0.3
ROA & Compe@@ve Advantage
0.25
Compe((ve Posi(oning

0.2 Semi-annual product release

Improving brand image
Prot Margin

0.15
Increased prot margin
0.1

Industry Average
0.05

0
0 0.5 1 1.5 2 2.5 3
-0.05

-0.1 Asset Turnover

Compe((ve
Summary Financials Valua(on Risk Analysis Conclusion
Posi(oning
Core Competency Sales, Cost Ini(a(ves & Earnings

FINANCIALS
 Core Competencies

YOY Sales Growth

Core Products
20.00%

15.00%
Accessories

10.00%

5.00%

0.00%

-5.00%

-10.00%

-15.00%

-20.00%

-25.00%
2008 2009 2010 2011 2012 2013

Compe((ve
Summary Financials Valua(on Risk Analysis Conclusion
Posi(oning
 Cost Ini@a@ves

700

600

500

400
COGS
300
OPEX
200

100

0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E

$60 million annual savings = $19 million COGS + $41 million OPEX

Compe((ve
Summary Financials Valua(on Risk Analysis Conclusion
Posi(oning
 Prot Margin

Revenues Net Income Prot Margin

1200 10%

1000 5%

800
0% Lower inventory
600 Higher asset-turnover
-5%
400 Results in increased:
-10% Revenue
200
Prot margin
0
-15% Net income
2010 2011 2012 2013E 2014E
-200 -20%

-400 -25%

Compe((ve
Summary Financials Valua(on Risk Analysis Conclusion
Posi(oning
Mul(ples Pricing & DCF Valua(on

VALUATION
 Mul@ples Pricing

1.50 Peer Group EV/Sales

2014 Es@mate
Peer Group Selec(on Criteria:
Luxury goods as primary source of 1.00
revenues
Small Cap Companies 0.50

Comparable Financial Ra(os

0.00

SWHC NLS DKS BC LF

Mul@plier EV/Sales
Forecasted Year 2013E 2014E
Mul(ple (Median) 1.14x 1.1x
Enterprise Value $957.2 $1014.1
Equity Value $887.5 $944.4
2014 Target Price $10.31

Compe((ve
Summary Financials Valua(on Risk Analysis Conclusion
Posi(oning
 Mul@ples Pricing

Protability Performance
10 Year Median 10 Year Average
60.00% 6

40.00% 4

20.00% 2

0.00% 0
NLS LF ELY SWHC DKS BC ELY DKS LF BC SWHC NLS
Gross Margin Opera(ng Margin Asset Turnover Inventory Turnover

Liquidity
10 Year Average
4 Gross margins typical of consumer
3 discre(onary sector
2 Low asset turnovers across industry
1 Strong liquidity among peers
0
DKS BC NLS SWHC ELY LF
Quick Ra(o Current Ra(o
Compe((ve
Summary Financials Valua(on Risk Analysis Conclusion
Posi(oning
 DCF Assump@ons

Key Drivers ELY

(+) Semi-annual product releases Mean Peer Unlevered Beta 1.17
(+) Chip Brewers proven leadership
(+/-) High degree of opera(ng Debt / Equity 31.30%
leverage Target Marginal Tax Rate 38.50%
(-) Market sensi(vity
Re-levered Beta 1.40
Degree of Opera@ng Leverage
5 Cost of Debt
4
Cost of Debt 3.75%
3
2
Tax Rate 38.50%
1 Aher-tax Cost of Debt 2.31%
0 Cost of Equity
-1 Risk-free Rate 2.83%
-2
-3
Market Risk Premium 7.75%
-4 Levered Beta 1.40
-5 Cost of Equity 13.68%
WACC 10.97%

Compe((ve
Summary Financials Valua(on Risk Analysis Conclusion
Posi(oning
 Target Price

70% DCF Valua@on

$9.57 USD
$9.79
$10.31 USD USD
30% Mul@ples Valua@on 2014 Year End Target Price
Upside: 7.11%
Holding Period Return: 7.22%

Compe((ve
Summary Financials Valua(on Risk Analysis Conclusion
Posi(oning
Opera(onal, Financial, Poli(cal & Market

RISK ANALYSIS
 Risk Analysis

Moderate Signicant
Limited
Losing Exis(ng
Growth
Suppliers
Opportunity

Conict Market Exchange Rate

IMPACT Minerals Demand Risk
Minor

Input Price
Seasonality
Fluctua(on

Low Medium High

PROBABILITY
Compe((ve
Summary Financials Valua(on Risk Analysis Conclusion
Posi(oning
 Risk Analysis

Moderate Signicant
Limited
Losing Exis(ng
Growth
Suppliers
Opportunity

Conict Market Exchange Rate

IMPACT Minerals Demand Risk
Minor

Input Price
Seasonality
Fluctua(on

Low Medium High

PROBABILITY
Compe((ve
Summary Financials Valua(on Risk Analysis Conclusion
Posi(oning
 Risk Analysis

Moderate Signicant
Limited
Losing Exis(ng
Growth
Suppliers
Opportunity

Conict Market Exchange Rate

IMPACT Minerals Demand Risk
Minor

Input Price
Seasonality
Fluctua(on

Low Medium High

PROBABILITY
Compe((ve
Summary Financials Valua(on Risk Analysis Conclusion
Posi(oning
 Risk Analysis

Moderate Signicant
Limited
Losing Exis(ng
Growth
Suppliers
Opportunity

Conict Market Exchange Rate

IMPACT Minerals Demand Risk
Minor

Input Price
Seasonality
Fluctua(on

Low Medium High

PROBABILITY
Compe((ve
Summary Financials Valua(on Risk Analysis Conclusion
Posi(oning
Hold Recommenda(on

CONCLUSION
 Conclusion

(+) Core (+/-) High degree

competency of opera(ng
focus leverage

(+) New
(-) High market
managements
risk
cost ini(a(ves

Hold

Compe((ve Financials &

Summary Risk Analysis Conclusion
Posi(oning Valua(on
 Ques@ons?

Q & A

Compe((ve Financials &

Summary Risk Analysis Conclusion
Posi(oning Valua(on
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