Description

We think it’s time to revisit TopGolf Callaway Brands (MODG) as the stock has languished for too long and the company appears ripe for strategic change.  At less than 8x 2025E EBITDA, you have several healthy, attractive, stand-alone businesses within MODG that should each command a higher multiple. 

Our sum-of-the-parts valuation is $29.52 (up +89%) on 2025 estimated numbers.  If there is no break-up, sale or other value-unlocking transaction, we expect MODG to put certain recent performance issues behind them and trade up to 10x 2025E EBITDA in a better tape for non-tech names.  This implies a standalone MODG target of $20.70, (up +33%).  In a harsh recession scenario, we have trouble seeing why MODG couldn't hold the current valuation.  

Please see two good VIC write-ups from the recent past for more background.  Houdini wrote up MODG in May 2023 at $18 before the company announced 2H 2023 slowdowns in both Top Golf and Jack Wolfskin retail sales.  BenHillGriffen wrote up ELY (the former ticker) in April 2022 with the stock at $22 after Top Golf had been bought in by the Company for $2.5B and while the company was enjoying the post-pandemic golf revival.

From mid-2021 highs in the mid $30s to 4Q23 lows around $10, MODG has compressed greatly in valuation, losing well more than the $2.5B they paid for Top Golf in market cap.  Primary reasons for this are a cooling off of the post-pandemic bump in sales and poor guidance from management around that.  The promising growth engine that is TopGolf hit very tough comps since mid-year 2023 and has shown negative foot traffic and declines in same venue sales (SVS) for the past year.  The (non-golf) outdoor apparel business Jack Wolfskin (acquired in 2019) has also failed to show expected sales growth since the acquisition.  The market’s malaise for small caps and non-tech stocks and the mis-match of disparate business profiles have all contributed to the poor stock performance.  

Yet, the market is clearly overlooking a lot of positives in the MODG story.  Top Golf is sequentially improving from the post-pandemic lull and does not seem at all broken as a growth venue concept.  More importantly, Top Golf has turned cash flow positive and thus self-funding for a continued robust venue expansion program. Jack Wolfskin management has been overhauled and its brand appears similarly untarnished with the consumer.  

The rest of MODG’s businesses are arguably high multiple gems. Travis Mathew, a golf-oriented apparel brand, was acquired in 2017 with 60mm sales.  This well-regarded brand will do over $400mm sales in 2024 and targets over $1 billion in the medium term.  The core Callaway golf balls and equipment are an established high-end duopoly with Acushnet’s Titelist business.  Acushnet (GOLF) trades at around 13x ebitda.  TopTracer (part of TopGolf), the leading ball-tracking technology that powers TopGolf’s 30,000+ bays, would be quite a valuable stand-alone business at $30mm run-rate revenue and a large global TAM. 

The activist playbook is kind of obvious here.  TopGolf could be spun off tax-free to shareholders to attract a shareholder base excited about its worldwide expansion and attractive unit economics.  The rest of the business could merit a re-rating as a pure play consumer business competing head-to-head with Acushnet in the revived golf category.  Chip Brewer’s retail expansion forays of the past could be carefully reviewed and streamlined which might ultimately lead to a disposition of Jack Wolfskin if it can’t resume adequate growth.  In the course of strategically considering a spinoff, a host of private equity buyers would likely have the chance to step forward for either TopGolf, Callaway or both.  

Sum-of-the-Parts.  Top Golf has around 100 domestic company-owned venues and plans to open 11 per year toward a long-term goal of 250 sites.  By all accounts, the 4-wall economics of new TopGolf venues remain very attractive.  An average $30mm (majority landlord-financed) build can generate 40-50% cash-on-cash returns for a 2.3 year payback period and mature venue EBITDAR margins of 35%.  The potential global franchising opportunity is equally as great with an additional 250 international venue potential.  With current free cash generation, Top Golf is ready to stand alone and should be attractive to a range of private equity buyers.  Clearly, it is highly undervalued as part of MODG in a public market myopically focused on the last SVS number.  In our sum-of-parts analysis we suggest a private market value of 13x 2025E EBITDA, adjusted for venue finance costs and estimated stand-alone corporate costs of $30mm.  

For the rest of Callaway, we assume it will remain public with all the financial debt.  We suggest it can re-rate to 11x 2025E EBITDA, a more reasonable discount to Acushnet.  In our final case, where nothing strategic happens, we suggest improving trends and market dynamics will allow MODG to trade at 10x 2025 EBITDA. 

Shares outstanding below include 15mm issuable in relation to Convert Notes.  Convert Notes and Venue Finance Debt are excluded from the debt count.  Venue finance costs are thus treated as a TopGolf expense.  

Catalyst

MODG is ripe for activist engagement, strategic review, spinoff or auction.

Trends are getting better after diappoinments LTM.