Tuesday, July 7, 2009

Callaway (ELY) upgraded at Lazard

AlphaNinja - Callaway Golf (ELY) has been dangerously close to "survival mode" lately. They've cut the dividend and have had to raise expensive money selling preferred stock. That said, the company's shares may be oversold.

Lazard upgraded the company's shares to buy this morning, and sees over 200% upside to ttheir $12 target. They cite that ELY shares are trading below book value for the first time in 15 years, and that equity investors seem to have forgotten that the company's "earnings power" is significantly above the breakeven expected for this year, and well above the 45cents expected next.

Lazard is referring to the 80cent range in earnings power that ELY has earned in recent years. (The 1.04 earned in 2008 was artificially and temporarily boosted by a "reversal of a non-cash energy derivative valuation account.")

It's important to note the difference between "earnings power" and "peak earnings." If Callaway bumps along over the years hitting an occasional 80cents in earnings, but the average is well below that, then the stock should not trade based on the peak earnings. ELY is cutting 10% of its positions, it has cut the dividend, and is laser-focused (successfully I'll add) on the gross margin. Even if the 80cents level is not the true "normalized" earnings power, I'd agree with Lazard that the shares are discounting pretty bad prospects at these low levels, and have quite a bit of upside.

The street is looking for zero earnings for Callaway this year (Dec09), on a sales decrease of 16% -->>significantly below what the company iterated in their previous earnings release. Upside to earnings estimates could be possible, and upside in the shares is quite likely.

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