Upside target: $38.00
Reward / risk ratio: 2.3
Recommended stop-loss: $28.00
Peet Serfontein, Pritu Makan
Callaway Golf Company designs, develops, and markets golf clubs—particularly premium-priced golf clubs that are popular among both amateurs and professionals. The group produces a vast array of golfing products including titanium drivers, fairway woods, irons, wedges, and various putters.
Fundamentals for the golf equipment industry remain healthy, with further upside potential expected as COVID-19 restrictions ease. Growth is expected to be driven by a number of key factors, including new product innovation, healthy market pricing, and clean retail inventory levels.
Technically, the price is currently forming wave #5 of the 5-wave structure, which makes the stock attractive as an investment option.
The price recently crossed above its 200-day simple moving average, showing that the long-term is bullish.
Relative Strength Index (RSI) forward calculations suggest that the share will be in overbought territory around $40, which classifies our profit target of $38 as realistic.
The on-balance volume (OBV) indicator— that uses volume flow to predict stock price changes—is currently moving sideways, indicating that money remains in the stock.
The lower panel depicts occurrences of bullish divergence (when prices fall to a new low while an indicator like the RSI fails to reach a new low), which often mark the end of a downtrend.
The entry range is $29.50 to $32.50 or as close as possible to the current reference price of $31. A fall below the suggested entry range suggests that a structural change in the trend is occurring.
Our upside target is set at $38 (giving ~22.5% upside potential from current levels), which is close to the previous high price. Profits can be harvested around this level.
Time to exit is around the end of November 2021 with the option of extending for a longer period.
Long-term fundamental view
Callaway Golf operates through two main segments—Golf Equipment (~60% of total revenue), and Apparel, Gear, and Other segments (~40%).
The segments house several key brands including Callaway, Odyssey, and OGIO.
The group sells its golf equipment and soft goods products in the US and internationally in over 100 countries directly and through its wholly owned subsidiaries to wholesale customers, and directly to consumers through its retail locations and online platforms.
Looking at recent results, the group delivered a solid second quarter performance with record revenue and EBITDA in the golf equipment and apparel businesses.
The results are reflective of strong momentum and an exceptional operating performance across all business segments, with interest in golf / outdoor activities remaining at an all-time high among both experienced golfers and new entrants to the sport.
The outlook statement was also quite positive, with management noting the group remains well positioned for long-term growth. A strong pipeline of pro-duct launches is also expected to complement growth.
Post-results, the group achieved record golf ball sales in July, capturing more than 20% of the US golf ball market, and further enhancing its position as the number two-selling golf ball brand.
In terms of downside risks, the group is exposed to changes in consumer behaviour / spending towards more essential items, given the current trading environment and strain associated with COVID-19.