Topgolf Callaway Brands: Teed Up for a Potential Rally?

Key Points

• Topgolf Callaway Brands has been in rally mode, advancing 13.60% in the past month.
• In the most recent quarter, the company reported earnings of $0.17 per share, beating expectations.
• Revenue in the quarter was $1.167 billion, up 12% from the year-earlier quarter.
• Analyst ratings show a consensus view of "buy."
• Topgolf had 77 company-operated venues in the U.S. and internationally at the end of 2022. It's since opened two more in the U.S., and aims to open more this year. 

Topgolf Callaway Brands Corp. NYSE: MODG may be on par for a share-price rebound. 

For now, stock performance appears to be whiffing, but there’s reason to believe the company has the potential to score a birdie for investors.  

Shares are currently in rally mode, advancing 13.60% in the past month, as they recover from a 13.12% gap lower following the company’s first-quarter earnings report. 

Until August 2022, the firm was known as Callaway Golf Company and it used the ticker ELY. It adopted its new moniker of Topgolf Callaway Brands and changed its ticker symbol to MODG at the same time. MODG is a nod to the term “modern golf.” 

Callaway acquired Topgolf in 2021 for about $2.5 billion. 

Slashed Outlook For Corporate Events

In the most recent quarter, the company reported earnings of $0.17 per share, topping views of $0.15. That marked a 53% year-over-year decline, but Wall Street expected an earnings drop. The stock fell because the company slashed its outlook for corporate events at its Topgolf locations. Corporate sales were slower than expected in March, causing the company to issue more muted projections. 

The concern is that that line of business may be trending lower. With companies tightening their belts amid inflationary pressures, it’s not a stretch to believe that Topgolf outings would land on the list of budget items to be cut. 

In the earnings conference call, CEO Chip Brewer addressed that shortfall, saying the company views this revision as a reflection of near-term volatility and not a long-term concern over the viability of the corporate sales channel. 

Walk-In & Small Events Remain Robust

“And importantly,” he added, “Our walk-in and small events business, which is the consumer-driven portion and accounts for 80% of venue revenue, has remained robust.”

Revenue in the quarter was $1.167 billion, up 12% over the year-earlier quarter, and beating views of $1.14 billion, as you can see using MarketBeat’s Topgolf Callaway Brands earnings data.

Nonetheless, Topgolf Callaway Brands analyst ratings show a consensus view of “buy,” with a price target of $31.50. That’s an upside of 60.22%, a significant gain over where the stock closed on June 13. 

Topgolf Callaway’s business is organized into three units:

• The Topgolf segment consists of driving ranges where people can play games, including Angry Birds, while they enjoy table service from the bar and restaurant. A substantial number of customers are non-golfers. It also generates revenue by licensing Toptracer, its proprietary ball-tracking technology to independent driving ranges, golf courses, and for use in golf broadcasts. 
• The Golf Equipment unit is the legacy Callaway brand, although the company markets other products under banners such as Paradym, Strata and Odyssey. 
• Active Lifestyle is the third business unit. It sells activewear clothing and golf gear under the Callaway, TravisMathew and JackWolfskin labels. 

At the end of 2022, Topgolf had 77 company-operated venues in the U.S., as well as company-owned and franchised locations in the U.K., Australia, Mexico, the United Arab Emirates, Thailand, and Germany. Over the next several years, the company’s focus is to maintain a pipeline of new venue openings domestically and internationally.

Opening 11 New Venues This Year

It opened one venue, in Charleston, South Carolina during the first quarter. A venue in King of Prussia, Pennsylvania, is teed up to open on June 19. In its first-quarter earnings report, the company said it’s on track to open 11 new owned and operated venues in 2023.

In the most recent quarter, the active lifestyle segment grew at the fastest rate, up 28% year-over-year. The golf equipment segment declined by 5.2%, but Topgolf Callaway, along with many companies, are seeing the effects of a drop in Covid-era purchases of outdoors and leisure-related products. Nonetheless, the golf equipment unit generates significant cash for the company, and due to post-Covid “noise” in the year-over-year comparisons, that sales decline didn’t worry analysts in the earnings conference call. 

Topgolf The Driver 

Topgolf is clearly the segment where the company is investing the most resources. That segment’s revenue grew by 25.3 % in the first quarter. 

The Topgolf Callaway Brands chart shows the recent rally, but also shows the price well off levels from earlier this year. Watch for the stock to overcome resistance above $23. That could be a signal that investors are ready to drive the ball home with a sustained rally.