BERKO: Par for the course
Friday, September 21, 2012 7:00 AM
Dear Mr. Berko:
In mid-2008, you recommended I buy 100 shares of AstraZeneca, which I did at $38. However, I am not pleased with the appreciation (less than 25 percent), because the Dow Jones industrial average is up so much more, and lots of stocks, such as Apple, have more than tripled. My broker suggested that I sell this stock to be more aggressive and buy 1,000 shares of Callaway Golf, which he thinks could quadruple, as he is told the company is working on a deal to become a leading supplier of golf equipment to China in 2014. What do you think?
H.E., Kankakee, Ill.
Emails such as yours make me cry because they confirm my belief in the dumbing down of American investors, who often seem to buy anything with bright colors that looks pretty. I’m surprised this broker didn’t tell you that Chairman Mao Zedong, Jimmy Hoffa and Rep. Barney Frank always played golf together every Chinese New Year. Meanwhile, did you know that golf, invented by a Scotsman who wanted to get out of his house to spend a few hours among male friends, is an acronym for “gentlemen only, ladies forbidden”?
I wouldn’t sell AstraZeneca PLC (AZN-$48.03) to purchase a schlumpy company such as Callaway Golf Co. (ELY-$6.18), which hasn’t made par since 2009 and won’t earn a profit this next year or next. Demand for ELY products has been declining since 2007. Americans are spending a lot less time on the links, and private clubs are hurting financially because many members can’t afford their dues. Club memberships have fallen 30 percent, and prominent private clubs all over the country are suffering negative cash flows, reducing personnel, scrambling to cut costs and suture losses. Today fewer Americans can afford the outrageous bucks for the newest updated golfing equipment (drivers with laser sights, demagnetized fairway irons, radio-controlled pull carts, heated golf bags to keep clubs warm in cold weather, shoes with designer cleats, topographical putters to read greens, air-conditioned golf carts with Wi-Fi and hi-fi, golf balls with programmable chips for specific holes, disposable sterling silver golf tees, etc.). ELY’s revenues, earnings and dividends look terribly worrisome over the next few years. Management needs to reduce overhead, trim inventory, improve manufacturing efficiency, eliminate administrative waste and cut sales costs to improve its bottom line. Considering a soft macro-environment over the next five years, ELY offers little potential. However, ELY has zero debt, a book value of $10.33 a share, only 65 million shares outstanding and a global brand name. The shares could double, but only if a leisure and recreational products firm such as Brunswick Corp. (BC-$23.93) or a leveraged buyout firm such as Bain Capital acquired ELY at $12 a share, cashiered useless board members, replaced management with creative leaders and hired marketing people who can play the game. However, this scenario is as bankable as a lottery ticket.
It’s apparent you don’t care to own a classy, blue chip-quality, $28 billion-revenue drug company such as AstraZeneca, which yields a sweet 5.9 percent. It’s disappointing that you don’t care to own a highly respected pharmaceutical whose earnings have grown fourfold in the past 10 years, while cash flow grew fivefold, book value tripled and net profit margins zoomed from 13 percent to 27.5 percent.
You must know that under “O-care,” doctors will soon be prescribing for 30 million additional Americans, so I don’t understand how you can ignore a classy company, whose future could benefit enormously from O-care, in favor of a piece of junk such as ELY. Certainly, this is apropos, given the greed and ignorance of the American investor (God help him), who will buy anything offered to him by an articulate salesman.
But if you must own ELY, consider its 7.5 percent convertible preferred stock (ELYZP-$96.15), yielding 7.8 percent, exchangeable into 14 shares of common stock. You’ll earn a sweet current yield, and ELYZP is callable anytime by ELY’s board at $100 a share.