Acushnet Holdings Stock: Upside Will Be More Limited From Here (NYSE:GOLF)

Personally, I have never been much of a sports fan. But when it comes to physical activities that are classified as sports, my favorite has always been, by a large margin, golf. I even tried out for and got accepted into my high school golf team what seems like a lifetime ago. But at the end of the day, I ended up prioritizing my studies instead. Even after college, I enjoyed golfing from time to time, though I will admit it has been a few years since I’ve hit the greens. This doesn’t stop me, however, from enjoying the game in other ways. And that is where two things that I enjoy, golf and business, intersect.

Back in November of 2023, I ended up writing a bullish article about Acushnet Holdings Corp. (NYSE:GOLF), the owner of the famous Titleist brand of clubs, balls, apparel, accessories, and more. It also owns the FootJoy line of products, though that accounts for a smaller portion of overall revenue. In that article, I talked about how cheap shares were. I also talked about some expectations that management had and what that would mean for shareholders moving forward. Fast forward to today, and shares have seen upside of 13.7%. That’s not bad, but when I rate a company a ‘buy’, it’s my belief that shares should outperform the broader market. And since then, the S&P 500 has risen by 14.4%. As disappointing as this shortcoming has been, the picture for the company does look to be fairly solid. But given how much shares have risen in such a short window of time, the stock is no longer as cheap as it once was. Due to this and in spite of the expectation of continued growth, I’ve decided to downgrade shares to a ‘hold’.

A major player that’s worthy of a downgrade

Back when I wrote about Acushnet Holdings in late 2023, we had data covering through the third quarter of that fiscal year. But today, date and now extends through the entirety of 2023. So a good place to start here might be financial results for the final quarter of last year. During that quarter, revenue for the company came in at $413 million. Although this is a nice chunk of change, it actually represents a 7.7% drop from the $447.4 million generated one year earlier. This is interesting because, as you will see shortly, revenue for 2023 in its entirety actually rose. This caused me to question whether there might be something changing for the worse. But digging deeper, I don’t think that’s necessarily the case.

This drop, according to management, would have been even larger had it not been for foreign currency fluctuations. On a constant currency basis, the sales decline was 8.6%. Management attributed this weakness to a couple of factors, including to a decrease in Titleist golf clubs sold. Management chalked this up to lower volume of second model year TSR drivers and fairways. These are clubs that were launched in the third quarter of 2022. Biggest point for the company during the quarter involved its golf clubs. These saw a 16.8% drop because sales volumes associated with the new T-Series irons that were launched in the third quarter of 2023 were not enough to offset the sales volume declines associated with the aforementioned fairways and drivers. In short, this seems like a customer rotation problem. Either because customers are already happy with the TSR drivers and fairways, or they are unhappy with the newest clubs, they are electing to purchase fewer of the new ones.

Unfortunately, we don’t really know which is which. Management has not provided much detail on this front. They did say that sales of the T-Series irons have been quite strong. So I don’t believe we have anything to worry from a long-term demand perspective. There was weakness elsewhere. There’s a 13.3% decline in FootJoy golf wear because of a reduction in sales volume associated with footwear. And there was a 2.5% drop in Titleist golf gear because of a reduction in buying associated with gloves and headwear. The only area where the company saw any strength during the quarter was when it came to golf balls under the Titleist brand name. Overall sales expanded by 5.4%. And this was because of higher sales volumes and higher selling prices associated with both the ProV1 and ProV1x golf balls that the company sells.

Geographically speaking, there was some weakness that is worth noting. The biggest pain from a monetary perspective came from the US. Revenue plunged 10.8% from $253.6 million to $226.2 million. An even larger decline came from Japan, with revenue down 26.4%. But with the drop being only $11.2 million from $42.4 million to $31.2 million, the impact to the company was not as great. You also have Korea, where sales actually expanded by 3.2%. But with overall revenue in the latest quarter of $60.5 million, the impact was not enough to offset weakness associated with the US market.

The company does sell products throughout parts of Europe, the Middle East, and Africa. But results there are a bit less interesting to me. This is because the three specific countries I mentioned represent the three largest markets in the world for golf. In an article that I wrote about Topgolf Callaway Brands (MODG) that came out last month, I discussed changing market conditions. The US is undoubtedly the largest market for golf on the planet. For many years, Japan had been in second place. But it stays in that position are certainly numbered. According to one source, over the 25 years ending at the end of 2022, the number of golfers in Japan fell by nearly half from 12 million to 6.5 million, while the number of golf courses dropped from 2,800 to about 2,500.

The good news is that South Korea looks set to take the crown from Japan. The value of the industry in South Korea is estimated to be about $9.4 billion. That’s about 216% higher over a 10-year window at a time when, in Japan, spending on the sport dropped by 9.5%. In the long run, South Korea will face some issues. I say this because, like Japan, it is contending with a fertility crisis. But for now, it’s perhaps the most attractive market for firms looking for growth. Of course, this doesn’t mean that we should ignore the US. Nationwide, there were 531 rounds of golf played. While this was up only marginally from the 529 million seen in 2021, it’s well above the 510 million reported for 2022. And the number of on course golf participants over this window of time has grown, hitting 26.6 million last year compared to 25.6 million in 2022. And this can really be chalked up to the sport becoming more favorable, particularly to younger groups, over the last few years.

On the bottom line, the picture for the company was mixed but largely worse than it was the year earlier. The firm went from a net loss of $0.1 million in the final quarter of 2022 to a loss of $26.8 million the same time of 2023. It is true that operating cash flow improved from negative $8.8 million to positive $74.9 million. But once we adjust for changes in working capital, we get a more modest improvement from negative $21.7 million to negative $10 million. Lastly, EBITDA for the company went from $25.4 million down to negative $1.5 million. In the chart below, you can also see financial results covering 2023 relative to 2022. Unlike the final quarter of 2023, 2023 in its entirety was actually better than 2022 was. Or at least that’s the case when looking at revenue and cash flows. But when it comes to net profits, it was slightly worse than the year prior.

The good news is that the lumpy results that we saw in the final quarter of 2023 should not impact the company’s abilities for the 2024 fiscal year. Management is currently expecting revenue of between $2.45 billion and $2.50 billion. That would represent an increase, at the midpoint, of 3.9% compared to the $2.38 billion seen in 2023. From a profitability perspective, the picture is even better. If things go according to plan, EBITDA will come in at around $395 million at the midpoint of guidance. This should translate to net profits for this year of around $208.4 million, while adjusted operating cash flow should be about $312.6 million.

With these results, valuing the company becomes a fairly simple process. In the chart above, you can see how shares are priced using data from 2023 and estimates for 2024. You can also see how shares were priced for 2023 when I last wrote about the company. What you can see is that shares, while slightly cheaper on a forward basis, are more expensive than they were last November. In addition to being more expensive on that front, they are also looking to be more or less fairly valued compared to similar enterprises. In the table below, you can see all three profitability metrics compared to the profitability metrics of five similar firms. When it comes to the price to earnings approach, three of the five companies ended up being cheaper than Acushnet Holdings. But this number increases to four of the five using the price to operating cash flow approach and the EV to EBITDA approach.

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Takeaway

Despite some temporary weakness, the overall financial health of Acushnet Holdings looks to be solid. Shares might be a bit pricey compared to similar firms, but the long-term outlook for the company is positive. Because of how shares have increased in price, however, they are no longer quite as attractive as they were before. Because of this, I’ve decided to downgrade the stock from the ‘buy’ I had it at previously to a ‘hold’. It wouldn’t take much, however, for me to upgrade the stock.