Here's something from the Motley Fool. (Today's news and downgrades are unfortunate. I guess we'll have plenty of time to buy this stock. As the article said, the company's pronlems are situational, but they don't appear to disappear anytime soon.)
FOOL ON THE HILL
An Investment Opinion
by Jim Surowiecki
Callaway Yells "Fore!"
El Nino has claimed another victim. Shares of golf-club manufacturer Callaway Golf (NYSE:ELY - news) tumbled $3 9/16 to $28 3/4 today after the company announced late Friday afternoon that the combination of disastrously rainy weather in its major winter markets and the residual effects of the Asian currency crisis would have a severe effect on the company's earnings in the first quarter. Callaway CEO Donald Dye suggested that earnings could miss analyst estimates of $0.36 a share by as much as $0.25 per share, which would be a shortfall of almost 70%.
The announcement, coming on the heels of Nike's (NYSE:NKE - news) similarly gloomy outlook for the quarter, suggests that Asia's woes are going to have a material effect on some American manufacturers of consumer goods, particularly those looking to the Far East as a booming market for leisure goods. As they did for Nike, international sales for Callaway slowed dramatically in the fourth quarter of last year, and that slowdown has continued through the first two months of 1998. Predictably enough, the turmoil in Asia has put a severe dent in the market for golf equipment there, particularly in Korea and Southeast Asia, but also in Japan. And the strong dollar has also bitten into Callaway's sales abroad. Ironically, a recent piece in Business Week's "Inside Wall Street" tip-sheet column suggested that Nike was looking at Callaway as a possible acquisition in its attempt to expand into the sports equipment market. That article drove up the stock's price, making today's tumble all the more dramatic.
Callaway's problems seem to be primarily situational, and the situation is such that it may be awhile before investors can expect any real improvement. Callaway became a major player in golf equipment in 1991, when it introduced Big Bertha, a metal wood with an oversized head that, along with its successors (Great Big Bertha and Biggest Big Bertha), has become the most popular wood on the pro tour and a huge favorite of weekend hackers as well. The company still gets close to 70% of its revenue from sales of the woods, which are made of aerospace-grade metals like titanium and tungsten. Callaway has also done a good job of expanding around its core business, adding a line of irons and putters, and more recently starting a golf-ball subsidiary. At the beginning of this year, the company introduced the Big Bertha X-12 Irons (what X-12 stands for remains a bit unclear), and received more than 100,000 orders for the irons in their first month of availability. Still, with 35% of those orders coming from abroad, it's possible that many of those orders will be delayed or cancelled.
Callaway has succeeded in creating a powerful brand identity for itself, such that saying the word "driver" to a golfer is likely to elicit the response: "Callaway." More than five million golfers use Big Berthas off the tee, and Big Bertha, in fact, has become such a desirable trademark that Spalding recently introduced a new golf ball, the Top-Flite Ball/Club System C, that it advertises as designed to "maximize performance when used with the Callaway Great Big Bertha." Rather remarkably, Spalding did this without Callaway's cooperation, and not surprisingly Callaway responded by taking the ball manufacturer to court. But the whole episode does showcase the strength of the product's brand name, which Callaway has tried -- with varying degrees of success -- to leverage into its other product lines at home and abroad.
Still, no company in the sports business has a stronger brand name than Nike, and name recognition has not saved it in recent months from maturing markets, overpriced goods, and continuing public relations difficulties. Callaway's woes are somewhat different. The company is at the mercy of the weather to an inordinate extent, particularly in the typically slow first quarter, where heavy rains in a few select regions can wash out a majority of its business. At the same time, while the market for golf equipment is growing in the U.S., the markets for explosive growth are all abroad. Insofar as the effects of the Asian crisis could put a serious drag on growth in emerging markets for years to come, Callaway investors may need to readjust their expectations for the foreseeable future.
The company's balance sheet is strong, with no long-term debt, but receivables have been climbing steadily over the last year. More importantly, while operating margins have stayed relatively consistent, Callaway grew earnings last year by less than 10%, while even with today's hit, the stock trades at a P/E ratio of 15. Until El Nino disappears and Asia is flying right again, it's hard to see a real upside to Callaway right now. Even with Big Bertha, it's a company that's not likely to drive the green any time soon.
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