This week, the golf world turns its eyes to its biggest tournament of the year: The Masters. While the professionals compete on the course, Callaway Golf (MODG 3.87%) hopes amateurs will try to model their game after the pros by buying new equipment and taking a trip to Topgolf. Here are three reasons why the golf equipment and entertainment company has the potential to be wearing the green jacket for your portfolio.
1. Topgolf makes golf accessible
It's been just over a year since Callaway completed its merger with Topgolf, a driving range where casual golfers can compete against friends. The entertainment venue has been popular with consumers, and the company projects over 30 million visitors in 2022, up 30% from 23 million visitors before the pandemic in 2019.
Image source: Getty Images.
Callaway sees a path to 450 total Topgolf venues -- a roughly 500% increase from its current count of 75. With that growth, Callaway believes Topgolf's annual revenue would be $3.82 billion, or approximately 210% higher than 2021's revenue of $1.23 billion. However, that vision may take some time to materialize as Callaway intends to only open 10 venues in 2022. Still, the company expects Topgolf's revenue to jump to $1.5 billion in 2022, or an increase of about 22% from 2021.
2. Strong guidance for 2022
While it shouldn't surprise that Callaway's merger with Topgolf resulted in record revenue for the company in 2021, its 2022 guidance shows that the company expects growth while maintaining profitability. Callaway guided for $3.78 billion to $3.82 billion in revenue for 2022, representing about a 16% increase from its 2021 revenue of $3.25 billion when adjusted for a full year of Topgolf.
While not a direct comparison due to Topgolf, rival Acushnet Holdings Corp (GOLF 1.47%), owner of the Titleist and FootJoy brands, guided for just 1.3% to 3.5% in revenue growth for 2022.
Furthermore, Callaway guided for $490 million to $515 million in adjusted EBITDA --a metric used by management that shows a business's ability to generate cash flow for its shareholders -- representing a 10% to 15% increase from 2021. For comparison, Acushnet Holdings guided for $325 million to $345 million in adjusted EBITDA for 2022, reflecting a -1% to 5% change from 2021.
3. The stock is cheap
Callaway currently trades at a price-to-earnings (P/E) ratio -- a common valuation metric comparing the company's stock price to its earnings per share -- of about 13. For comparison, Acushnet Holdings, which has a dimmer 2022 outlook than Callaway, trades at a P/E ratio of about 17.
Callaway, currently valued at a $4.4 billion market capitalization, has seen its stock slide about 16% in 2022. Meanwhile, the S&P MidCap 400 ETF, an index fund with companies averaging a $6.1 billion market cap, is down about 5% year to date.
Is Callaway stock a buy today?
On its face, Callaway appears to be a cheaply valued stock with a promising growth outlook. However, one downside includes its rising total net debt, which ballooned from $406 million in fourth-quarter 2020 to $1.4 billion in Q4 2021. The Topgolf merger accounts for most of that total net debt, but it's something to watch as each new Topgolf costs $10 million to $40 million to build. And with interest rates rising, the company will likely be paying higher costs if it needs to borrow any additional money.
Callaway will also be diluting its outstanding share count this year to the tune of 9% to account for a convertible bond -- debt that can be exchanged for its common stock.
Still, Callaway Golf is well-regarded in the golf community and has long-term growth potential with Topgolf. Look to see whether the company can execute on its lofty Topgolf expansion goals while meeting its revenue and adjusted EBITDA guidance for 2022. If the company sees success in those areas, the stock could be a major winner.
Collin Brantmeyer has no position in any of the stocks mentioned. The Motley Fool owns and recommends Acushnet Holdings Corp. The Motley Fool has a disclosure policy.
