Two weeks ago in
A Pattern of 18 Percent Average Gains
, we looked at
Callaway Golf (NYSE:
and noticed a pattern in its returns. Due to the effects of
seasonality, if you bought its stock on July 20
and sold it on April 1
of the following year, your average annual gain over the last 10
years would have been 18.4 percent. You also would have made a
profit in 7 out of 10 years. Being right 70 percent of the time is
pretty good in any market.
Two weeks ago when we looked at Callaway, the stock opened at
$5.97 a share. In last Thursday's trading session, the stock
reached a high of $7.10, a return of 18.9 percent in just 8 trading
days. I hope you had a chance to take advantage of this
Today I wanted to check in on the company and give an update on
fundamentals and the stock price. The company reported earnings on
after the bell. Let's take a look at the results and see how the
stock has reacted.
***Callaway's net sales were flat this past quarter, but
increased by 6 percent for the first six months of fiscal 2010. Net
income increased by $4.6 million, or 11 percent, in the second
Excluding the $0.01 charge related to its Global Operations
Strategy, Callaway's adjusted EPS of $0.15 beat analysts' estimates
of $0.14 by a penny, according to Thomson Reuters.
Many investors anticipated sub-par results from the company this
past week - mainly because the company had lowered its outlook for
the quarter back in June. In the sixteen hours (two sessions) prior
to Callaway's second-quarter earnings report, investors locked in
profits and stayed clear of any uncertainty. The stock dropped 6.9
percent in those two days of trading.
However, you can see that investors quickly jumped back into the
stock the day after the company reported earnings. The stock
reached a high of $7.03 on Friday, up 5.4 percent from its open on
the previous day.
Although investors focused on the positive aspects of the
earnings report, the outlook for Callaway and the golf industry is
not as attractive as some had hoped.
***The golf industry is still trying to recover to its previous
levels of growth, but lower spending due to a slumping economy has
hurt Callaway and other competitors. CEO George Fellows had this to
"While the golf industry will recover, given recent increased
uncertainty regarding retailer and consumer spending in the back
half of the year, it does not appear that the industry will fully
recover during 2010"
CFO Brad Holiday added,
"The unusual uncertainty caused by the current macroeconomic
and market conditions make it impossible to forecast retailer and
consumer demand for golf products with any reliability"
The comments of both executives go to show just how the current
environment is impacting the industry, and the company.
With so much up in the air, Callaway plans to focus on aspects
of the business it can actually control - including improving
operations, closely managing discretionary spending, and investing
in high-growth areas like emerging markets to drive shareholder
Callaway's second quarter sales in the U.S. were lower by almost
1 percent year-over-year. Although this decline in domestic sales
is not bullish for the company, it does currently bring in around
half of its revenue from international sales - so there is a market
opportunity out there. The chart below shows a breakdown of sales
International diversification should continue to support the
company's revenue stream and decrease its dependence on the US
recovery. Developing countries generally recover faster than
developed countries after an economic downturn.
Although the company's outlook for 2010 continues to be
uncertain at this point, I think Callaway is a strong company and
should perform well in the future - partially because it is
expanding into key high-growth markets.
***Now if you bought the stock at the open on July 20
, the ultimate question is what to do with your current 13 percent
gain (the stock has pulled back a bit). This 13 percent gain came
in only 9 trading days. Remember that the average gain (from my
previous article on Callaway) was 18.4 percent - but over 9-months.
Should you wait 9 months when you're close to making the same
amount in only 9 days?
Well, looking at the returns for this trade over the last ten
years, we see that two years generated returns (over the period
discussed above) of 58 and 78 percent. If you dump the stock now,
you may be kicking yourself in April if similar gains materialize.
I'd be inclined to hold the stock for now, and look to exit anytime
you're up 20 percent or more.
However, if you're happy with a 13 percent gain in 9 days I
wouldn't blame you for selling. That's around the long-term annual
average return for the S&P 500, but in 356 fewer days.