BERKO: A swing and a miss
Friday, December 21, 2012 7:00 AM
Dear Mr. Berko:
What do you think of Callaway Golf stock? I’ve been a serious golfer for 20 years, and my friends and I believe Callaway unquestionably makes the best clubs and balls on the market. None of us would consider owning another brand, and I credit Callaway equipment for my 8 handicap. While I advise every serious player to buy Callaway clubs and balls, I need your advice on purchasing 2,000 shares of the common stock that is selling at $6 a share. What do you think?
E.D., Port Charlotte, Fla.
Callaway Golf Co. (ELY-$6.52) makes a fine golf club, but truth be told, ELY’s clubs are no better than those made by Cleveland, Cobra, Nike, Ping, Taylor or Wilson. Though some may swear on stacks of shrink-wrapped bricks of hundred dollar bills that Callaway’s clubs are best clubs in the galaxy, most professionals will tell you there’s not a tinker’s damn of difference. The same can be said of golf balls. A Callaway ball doesn’t travel farther or straighter than a Dunlop. Nor does a Noodle, a Top-Flite or Srixon perform any better than any other 1.620-ounce ball approved by the PGA. I had this discussion with two professional golfers a year ago and both agree. I asked one pro why he used Titleist clubs and the other why he used Ping. Both responded that they were paid to use that brand. Sorry to burst your bubble, but that’s golf gospel.
ELY, which I wrote unkindly about in a column nine months ago when it was $6 a share, is only marginally higher at $6.52. In addition to clubs and balls, ELY also sells golf bags, gloves, footwear, headwear, eyewear, guy- and gal-wear, umbrellas, towels, range finders and travel gear. Wearing and using these accoutrements are, like an Armani suit, supposedly give the semi-serious and not-so-semi-serious golfers a dash of panache and hauteur. It doesn’t improve their game! Last year, ELY moved $896 million of branded “stuff” to pro shops, field reps, third-party distributors, sporting goods stores and mass merchants. And in the process, ELY plans to report a 2012 loss of about $170 million. Meanwhile, in 2011 ELY lost $19 million on $967 million in revenues, and in 2010, it lost $15 million on $950 million in revenues. Unfortunately, 2013 doesn’t look any better than the previous years. The problem here is not so much revenues but rather stinky management with a lousy swing that has too many slices and hooks in its daily operating costs and too many sand traps and roughs in its selling and administrative expenses. ELY has a strong balance sheet, zero debt, just 65 million shares, more than $5 in cash per share and a book value of nearly $10 per share. But I wouldn’t care to own the stock, which pays a 4-cent dividend from its $340 million cash stash.
I would however, be comfortable owning 100 shares of its 7.50 percent series B, cumulative, perpetual, convertible preferred stock (ELYZP-$96.62) that trades on the OTC exchange. The $100 par value preferred yields 7.76 percent, has no maturity date but is redeemable on ELY’s option at $100 plus accrued interest. ELYZP is convertible into 14.18 shares of common stock, and if ELY trades around the $7 level, the bonds will move to a small premium. Meanwhile, the $7.50 dividend is payable at $1.875 a quarter on the 15th of March, June, August and November. And if you are a true golf aficionado, I recommend that you purchase 100 shares of the preferred and show it off to your golf buddies who are earning 0.25 percent on their savings. If ELY moves to the $9 or $10 level, where it traded in 2010 and 2011, the convertbfle preferred could easily trade at $150 a share. There are only 1.4 million preferred shares outstanding, so be careful when placing an order and tell your broker to place a limit price on your purchase. ELYZP could be a smart speculation.