In Focus

Is Callaway as Big as Bertha?

NOTE: This past month we have been featuring all the companies that we proposed for our last buy. Chick Julie owns a golf course and has played golf for the past thirty-nine years. (I don't know how she could have possibly come out of the womb with a club in her hand, but there ain't no way she is older than 39. You're welcome, Julie.) She had an understandable interest in Callaway. FOOOOOOOORE! Give her a club and she's all over the course.

Writing about Callaway was easy. My family always enjoyed sports; playing them, watching them or listening to them on the radio. When I was a kid my dad gave me a few clubs and off to the golf course we went. We lived in a small town, but it had a great little 9-hole course. I remember once asking my dad why I couldn't have a "big club" like he had in his bag. He said that I didn't need any woods and that I could hit a 3-iron just as far. He was wrong. To this day, I still can't hit a 3 iron. Anyway, I started to play pretty well and during the summer I would play as often as possible. We had steel shafted clubs; the drivers and other clubs were made out of wood back then. Not having any money to buy my own clubs, I depended on my dad to pick out the clubs for me to use. After college I bought my first set of clubs and have been trying different kinds for about 15 years. I've been using Callaway for the past several years. There are many, many different golf equipment manufacturers but I have decided to report on Callaway.

If someone were to say, "Pass me a Kleenex" you'd know immediately what they were talking about. Same goes for Callaway and their leading club... the Big Bertha. It's common course language to hear someone say, "My Bertha wasn't working today." Callaway is a leader in clubs, with their successful Big Bertha series, the Hawk Eye and the Steelhead. They also make Odyssey putters and Callaway Golf Balls.

Callaway satisfies both the Keep it Simple and Buy What You Know criteria. Golf is simple - a club, a ball and grass. Millions of people watch or play golf. In the past 30 years the golf industry has exploded. We have hundreds of new golfers taking up the game each year and many more junior golfers. Golf courses are sprouting up everywhere. Tiger Woods has become a household name because of golf. Annika Sorenstam is an idol of many young girls on the course. Annika has an endorsement deal with Callaway.

Callaway's philosophy is that any club, ball or putter in the Callaway Golf family must be a significant improvement over their competitors, and also over their own existing equipment. It's a philosophy that their founder, Ely Callaway, carried throughout his half-century in business. Ely Callaway started the company back in 1962 and is still Chairman of the Board.

"Callaway Golf has always believed that the way to grow the game of golf is to make it more enjoyable for the average golfer. That is why we try to design, create, build and sell the most forgiving golf clubs in the history of the game - giving more golfers more opportunities to hit a few additional 'great' shots each round. We intend to continue to grow the game by helping people enjoy the game." - Ely Callaway*

Born in LaGrange, Georgia, Mr. Callaway graduated from Emory University in 1940 and joined the United States Army as a Reserve Officer in the Quartermaster Corps at age 21. He was assigned to the Army's Centralized Procurement Agency for textiles and clothing at the Philadelphia Quartermaster Depot, and soon became one of the five top procurement officers there. He held that position throughout WW II. He then went on to work at a textile firm and then on to Burlington Industries. He moved up the corporate ladder and eventually became President in 1968. He then founded Callaway Vineyard in Southern California. He developed the winery and started Callaway Golf in 1982. In 1996, Callaway became the world's largest maker of golf clubs. He just retired last month at 82 as a result of medical problems. Ron Drapeau, 54, was named the new CEO.

According to Smart Money's Industry Comparison, Callaway falls into third place behind Brunswick Corp. and Oakley. Brunswick manufactures sporting goods (boating, billiards and bowling... no golf) and Oakley makes some pretty cool sunglasses to wear on the golf course, but that's as close as they get to direct competition. So, in essence, Callaway is the leader in Golf's Sporting Equipment with a market cap of 1.1 billion and annual revenues of 889 million. With gross margins of 47% and net margins of 8%, the company looks pretty Chicky. Add to that, they have no long-term debt, lots of cash, a Flow Ratio of 2.19 and the year 2000 sales have increased 16% over 1999.

Recently, however, Callaway got some bad news and had to lower their 2001 earnings estimates. The U.S. Golf Association has outlawed one of their best selling drivers, the ERC II, along with 27 other drivers. The claim is that the face of the clubhead reacts with a spring-like effect, giving the golfer extra or "stolen" yardage, so the ERC II has been banned in the United States. The R&A (USGA equivalent in England) doesn't agree with the USGA and the R&A allows the club to be used in their games. Callaway believes that the ban is the cause of the drop in sales in the first six months, and expects these conditions to continue, including the ban on the ERC II. Outside the U.S., however, sales have exceeded expectations. Personally, I believe Callaway should build clubs that conform to the rules. We'll just have to wait and see...

One interesting note: the ticker for Callaway on the New York Stock Exchange is ELY. E-L-Y. Looks like Ely's ego may be about as Big as his Bertha.

* From www.callawaygolf.com