 Good day fellow investors. Today's Sunday stock analysis is Callaway Golf. It is a leader in its niche which is golf clubs and golf balls and there are some other developments which make the company interesting. So let's dig into the sector, the company, the fundamentals, the risk reward to see at which price it is a good investment and whether now it is a good investment. Let's start. Callaway Golf is a stock that has surged 153% in the last five years and is a great example of what this market is all about. More about that at the end. So the company manufactures and sells golf clubs and golf balls in addition to golf and lifestyle apparel and accessories under the Callaway Golf for these say Ojo and Travis Matthew brands worldwide. The most sales come from the US 54%, 90% comes from Japan and the rest from across the globe. The company boasts a 12% annual growth in market share which is something remarkable but we have to see where does it come from. Fundamentals show stability up to 2017 when there was revenue growth, margin improvement and more cash flow operations. The most important question investors want to know now will the growth continue or is the story about to end become more risky because then investors would be in trouble. Let's first look at the fundamentals. The price to earnings ratio is a bit high now 35 with the forward consensus price to earnings ratio of 25. Price to book is 2.41 and the dividend yield is 0.23% very very low dividend yield. Let's look at the key ratios page that will tell us a little bit more about the company. So the key to understand the company like Callaway is that it is cyclical and that people usually play golf when things go well in their lives. Its revenue is still below 2007 levels and just in the last few years have its margin reached the previous levels. Net income was higher in 2008 at 66 million than it is now 10 years later. Something also very important to notice that the number of shares outstanding went from 64 million to 97 million where the book value went from 9 dollars to the current 7. What is positive about the company is that it has no long term debt but it has increased its short term asset based credit facility to 97 million from 11 million. Inventories jumped 38% thanks to an acquisition while intangible assets in 2016 went from 88 million to 225 million. The increase in intangible assets comes from 75 million OGO acquisition and the 125 million Travis Matthews acquisitions in 2017. The company Travis Matthews they acquired for 125 million had sales of 55 million in 2017. So the company now got some cash and they started acquiring other companies and this is typical of Wall Street. Wall Street wants one thing they want constant over everlasting growth and the management the poor management want to please the analysts that lead to investor that push the stock price higher. What then what they start doing they start doing stupid acquisitions they think everything is going good we are great management we turned around the company and then they spent 200 million dollars which is what three four times the yearly earnings on acquiring two brands that the owner wanted to get rid of because the owner of those brands developed those brands and now it's selling them and that is the first risk I see with Callaway. What will happen to those brands and will those brands add to the earnings over the long term? That's the main question given the cyclic quality Callaway has shown also in 2007. So dilution 50% there has been plenty of shareholder value destruction and what does the management decide to do now that the stock price has more than doubled over the past five years. Now that they have cash make acquisitions they decide to increase the buyback to further destroy shareholder value because now they buyback shares at double the book value instead of buying them two three four years ago when the stock price was much much lower buybacks went from 5 million 2016 to 17 million in 2017. Nevertheless the management sees its key growth drivers in the new driver that they developed and in the increasing beginner numbers of golf players. However I look at the up chart here on the right and I see a declining number of total golf players so the sector is in a structural decline. Nevertheless there are some good things top golf the trendy golfing clubs the company owns is just a small part of the company but they sold 10% of what they owned for 23 million in 2016 and this is something I don't understand if it is such a great business why would they sell something in 2016 and then even worse in 2017 they invested 20 million back into the company in an investment round by Fidelity. So the company had a stake in top golf then sold part of a stake for 23 million 17 million gain you pay taxes on those gains and year later they put back 20 million into the company so why did they do that in out in out of course that's something behind the wall that we cannot see that's happening with top golf but we don't know whether the company is profitable the company is hugely expanding so that's always a risk but also a potential reward let's see the company is spending expanding very fastly you can see on their instagram how there is building all around the states and those are okay they have to buy a lot of land or lease the land build a nice platform that's costly to operate and that's very trendy now however the question is with the declining golf numbers whether these clubs will be still interesting over the next few years I'm always looking at long term I always include the recession in what I do so those are the risks other rewards are the dollar is getting weaker which means 46% global reach that those profits will be much higher in dollar amounts another question is okay if the company continues to grow if the company continues to acquire those small players even if they come I think they are overpaying nevertheless if they can continue to acquire those implement in their selling lines and improve the margins then it might be even further growth for Callaway ahead so that's a positive reward again we are talking about a market leader with 23 percent market share in Europe in Japan and in the US so very very strong market leader and Nike and Adidas have exited the production of golf clubs and golf balls in 2016 I think so that was a good for Callaway and they really are taking advantage of what's going on back to top golf I didn't mention that the current value of top golf estimated by the company the fairly value is 290 million or about three dollars per share so you can see how to go about that whether that is something fairly valued or overvalued let's look at the risks and this is something that I find very very risky because I see the company pursuing the growth imposed by Wall Street in the last earning calls the management increased its credit facility to 360 million and that's something I don't like as they have made too big acquisition to 17 and they are planning on making more acquisition and this time using a loan so 225 million of intangibles I would not add even more loans before I see how these acquisitions work out but it seems that they are really pursuing growth on the valuation side top guidance for 2018 without non-recurring costs which are always there every year leads to price to earnings ratio of 23.4 any kind of costs in that year would keep the price earnings ratio to 30 this implies an earnings yield of 3.3 percent for a company that didn't actually grow over the last 10 years and isn't in declining sector in case of a recession in case of write-offs in case of not things not going as planned and whenever you see those synergies those integrations or of other brands things never go as planned and in this market where everything is overvalued in order to buy something you have to overpay for it there is no other so the upside the reward is about return of 3-4 percent if they grow earnings it will become 5 percent but they can't grow much more than they have been growing in the past so 3-4-5 percent and in case of a recession we fall down to book value if we impair another three dollars of the intangibles then we fall from 7 to 4 top golf is their value if we add that up which is not on the book value because they account it at cost they will have to account it at a fair value this year so that might be a change so we might see book value at 10 impairments not impairments let's see it will be fluctuated because of the top golf stake that they have so let's say downside from 10 to 5 so for me 4-5 percent return over the long term against a 50-60 percent downside is not the risk reward that I like so to conclude back to the typical market the typical representation of the market chasing growth at any cost and that's something that is very risky that scares me but that's the shorter mindset that most investors have unfortunately analysts and wall street and that leads to great companies like callaway great niche company leader market leader doing stupid things that might turn out very bad in the long term as it has been the case in 2007 history is repeating again thank you for watching looking forward to your comments do you have any other niche companies that are market leaders that you want me to take a look at or at least put on my list you never know when will a new analysis come out see you in the next video