Motley Fool Money - Time To Buy Golf Stocks?

Episode Date: May 15, 2023

Sometimes you need to stop thinking, let things happen, and be the ball. (00:21) Jason Moser discusses: - EU regulators approving Microsoft's deal to buy Activision Blizzard (but investors being skeptical) - Peloton recalling more than 2 million exercise bikes - Why he's keeping a close eye on Home Depot's earnings report on Tuesday (13:00) Nick Sciple joins Jason to discuss the business of golf and analyze two publicly-traded golf companies. Companies discussed: MSFT, ATVI, SONY, PTON, HD, WMT, TJX, TGT, MODG, GOLF Host: Chris Hill Guests: Jason Moser, Nick Sciple Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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I'm Chris Hill joining me today. Motley Fool Senior analyst, Jason Moser. Good to see you. Hey, good to see you. Happy Monday. Happy Monday. We're going to start with some news that broke this morning. Regulators in the European Union have approved Microsoft's proposed acquisition of Activision Blizzard. They said the concessions that Microsoft have offered around cloud gaming are enough to alleviate any antitrust concerns. I will just remind everyone that it was just last month that regulators in the UK basically said the opposite, and they blocked the deal. They stand by that decision here in the U.S., the Federal Trade Commission has yet to make

a formal ruling. But, Jason, you look at both stocks, and it looks like investors have, have decided. decided they are going with the UK on this one. They don't think the deal is going through because the shares of Activision Blizzard are basically, you know, they're up half a percent on this news. Yeah. Well, I think that's because ultimately, you know, this has not been solved, right? I mean, I think the first thing that came to mind when I saw this headline, I mean, it just made me think of the office in the episode with Snips, snap, snip, snap, snip, snip,

If you're a fan of the office, then you know what I'm talking about. If not, I mean, what are you doing? Seriously? You know, yeah, the UK competition and markets authority from, I guess, a couple of weeks ago, said they opposed the deal. Now you've got the European Commission, which is the EU's executive arm, saying that they are okay with the deal as long as certain remedies are met. Primarily the remedies are. What we've discussed before is making sure that rivals have.

access to that content for at least 10 years, right? Because there's two dynamics that really come into play with this deal. You've got the Microsoft hardware side of it with Xbox, you know, and then you've got the Activision Blizzard side of it with the content. And I mean, Sony's PlayStation, I think by all accounts, really is the market leader on the hardware side, but it's also very understandable Sony's concerns that, listen, if you're going to take the most popular gaming content out there. I mean, Call of Duty, you know, World of Warcraft. I think Call of Duty is really the B's knees for most. Locking that into a certain hardware environment could be scary, right? And so now we've got this advent of cloud gaming, which is ultimately

what Microsoft is pursuing, and they're making these promises that this content will be available. So I guess now, you know, we're going to have the next level chef it and go to a third voter, right? We've got one entity saying they're okay with it, one entity saying they're not. This now kind of boils down to the FTC, I guess, and Dave will, I'm sure, take a commentary from Sony into consideration as well. But yep, it's not a done deal. It's not a guaranteed deal. I guess you just live to fight another day.

Yeah, it's going to be interesting to see how hard Microsoft and Activision Blizzard, but really Microsoft fight for this at this point, because, you know, it's going to be interesting, because it's easy for me to imagine if the EU came down on the same side as the UK and just said, yeah, we're against this too. Then it's a little easier to sort of fold your cards and say, all right, let's just wrap this up and hand the $3 billion breakup fee check to Activision Blizzard and everybody gets on with their lives. But the split vote, I don't know, it makes it a little bit more interesting. It does. And I mean, I do think that Microsoft is going to fight very

hard for this. I think given what we saw from the CIA, the UK Competition of Markets Authority, when they even noted, I mean, they didn't feel that the acquisition would reduce competition in the console market, right? And that's one of the big concerns there is the console market. I mean, it does feel like you're starting to see this deal take shape. You're starting to see Microsoft making the necessary concessions. And I don't know. I don't really. I mean, it's always interesting to think about things like this when you're going into an election year, which is obviously, I mean, we're going into election season here soon. And everybody's kind of got this perspective on big tech and antitrust.

And this is clearly one of the bigger deals we've discussed over the last several years. So again, yeah, it doesn't seem like it's dead. But yeah, Microsoft still clearly has its work cut out for it. Last Friday, shares of Peloton hit an all-time low after the company announced a recall of more than 2 million exercise bikes that have been sold in the U.S. starting January 2018 through basically this month. So more than five years worth of bikes sold at Peloton, Dick Sporting Goods, Amazon. I want to be clear, this is a recall that just involves bikes sold in the U.S., not outside this country. But I don't want to say this is the final nail in

the coffin because I don't think it is. But I do think it caps what has been a breathtaking fall from grace for this business. Yeah, I mean, it is just insult added to injury and definitely not what the company needed. I mean, you've got a situation here where they're already dealing with very difficult setup, just from a financial's perspective, right? I mean, the business itself isn't growing, right? the company finds itself in this nasty 1.5 billion plus net debt position in really trying to find the sustainable path forward. And clearly, the thesis has changed considerably since this thing

first came public. But I will say this really could be a lot worse. This could be a lot worse. Now, I mean, it's not good. I mean, you're talking about 2.2 million bikes. I mean, I've seen, I've seen some estimates where they've sold in the neighborhood of two and a half million bikes or so now I'm not really certain. We can go back and double check that. Any which way you cut it, recalling 2.2 million bikes, dating back to when they started selling in January of 2018. I mean, this is a lot of bikes in the context of how many bikes they have sold.

And that's bad. Now, the good thing is that it does seem like a fairly easy fix. I mean, they've done a good job, I think, in getting out there and communicating. They've let consumers know you need to immediately stop using this bike. And you can contact Peloton for a free repair. Now, this repair, it's not something where you have to ship this bike back. You don't have to take it somewhere. You don't have a technician come to your house to fix it.

It's an order of free seatpost that's provided by the company. It can be self-installed. And that sounds like it takes care of the problem. And it's definitely a problem that is growing, right? I mean, they've got 35 reports of the seat post breaking. They've got injuries, including a fractured wrist, you get lacerations, bruises. I mean, people start reading that. I mean, this stuff can really start snowballing.

So as bad as it is, it certainly could have been a lot worse, but not something the company really needed to deal with right now. Absolutely not. And you're right. I mean, give them credit for moving as quickly as possible to solve this. and really try and lean into the customer service aspect of this business because it is a more high-touch business than other basic fitness equipment that you can buy, where it's just sort of the customer relationship ends once you have made the purchase.

So they're doing the right thing there, but it's a lot of bikes. And it just makes me wonder how much time this business has left on its own. It is a lot of bikes. And it's kind of interesting to sort of see how really, recalls impact companies differently. The first thing this made me think of was, you know, we got a recall notice for one of our family cars, the car that my daughter's drive, which is a Ford and it's a, I don't know, 2015 or something like that. But you know, like with auto makers, you get recalls all the time. And in most cases, I mean, I think most of the time, people

kind of let them slide. They don't really mess with them because they can be kind of a hassle. Now, if you take your car in to get serviced where you bought it, at the dealership, whatever it may be. Oftentimes, they'll just be like, hey, we're changing your oil. We see these outstanding recalls. We're going to fix the recall while we're at it. And so that's very convenient. But most of the time, it's just not very convenient to take time out of your day, run in there and go do it. But one of the things I found Ford did recently, they were actually offering a mobile appointment to come to where our car was so they could go ahead and fix this recall. Now, part of me wonders, does that mean this recall is a bit more?

serious than others? I'm not sure and I'm not going to take any chances. But it is one of those things I think that whenever you're making big equipment like this, this is just part of the deal, right? You have to expect this to happen. So in the case of Pelotonier, while it's, you know, they didn't, bad timing, of course, it could have been a lot worse for something that is just going to be unavoidable given the nature of what they do. It's a big week for retail earnings. We've got Home Depot, Target, TjX, and Walmart that are among the big companies. reporting this week. I'm curious if there's anything in particular you're going to be watching for. For me, it's Target and then their inventory management and how that's going. Hopefully

it is moving in the right direction. But what about you? Yeah, I'm actually keeping an eye specifically on Big Orange, Home Depot, a stock that I've recommended, a stock that I own. I think a lot of people out there know I like it, becoming a more, more meaningful part of my dividend portion of my retirement portfolio, hopefully for obvious reasons. But I mean, it had not been a great year to date. Stock down around 9% with the S&P up around 7.5%. Granted, most of that has occurred over the last three months. We've seen a lot of consumer concerns, obviously bank system failures, and just questions regarding recession on the horizon. So I'm not terribly surprised at the stock having a little

bit of a challenging first half of the year. But in looking at their last quarter that they reported, You know, they started that narrative of, yes, we're seeing transaction normalizing as consumer spending shifts from goods to services. And that definitely plays out in Home Depot's numbers, right? And not in the good way. Now, I don't think that's something that should deter investors only to take a longer view here. I mean, ultimately, you know, management guided for the quarter for earnings to actually, the guiding for the year, last quarter, they're guiding for this full year's earnings.

earnings to actually contract by about 5%. If you extrapolate that out, you've got a company that's still going to bring in probably around $16 per share for the full year, which values these shares today at less than 20 times those full year projections. Now, I'm not sitting here telling you that's a buy, but I think historically it's an opportunistic price for what is a very reliable business. The question is, will that guidance hold? That I don't know, but hopefully we're going to get some insight there, but we definitely saw signs

last quarter that things were slowing. The business was contracting a little bit. On the flip side, it was benefiting from things like lumber prices. We saw that lumber inflation come down, which played out on the revenue side in a bad way, but played out on the margins side in a good way. So I think just getting a little bit more insight as to how they see the rest of the year playing out sort of the state of the consumer today in relation to the home. Jason Mosezer, always good talking to you. Thanks for being here. Thank you. Jason is actually sticking around so he can hit the links.

The sport of golf boom during the pandemic, but it's worth asking if the industry is starting to shrink a little bit. Nick Seipold joined Jason to take a look at two publicly traded golf companies and see if either is investable. This segment was recorded last week before Topgolf Callaway came out with their first quarter results. are down about 15% since then. First, let's step back for a second here and actually try to take a look at one of the bigger

questions we always want to answer as investors is the market opportunity, right? What kind of market opportunity are we looking at here? How do you view the market opportunity as it pertains to golf? Sure. Well, I mean, golf is big business, particularly in the United States. 41.1 million Americans played golf last year. That's good for 12% of the population. You want to dig into that a little bit deeper, about 25 million of those played exclusively

on course going out and playing your traditional 18-hole golf, the type of golf they've been playing since the 15th century in Scotland. This is very much a Lindy hobby if you want to think about it that way. And another about 15.5 million of folks who played exclusively on places like Topgolf, which we're going to talk about Callaway earlier, Sim Golf, which is an emerging business. just on your traditional golf courses. When you look at over 10% of the American population participating in a pastime every year, significant, significant business. Now, golf participation had been trending down post the big tiger boom, also post the 2008 recession. You saw

a number of golf courses closed. I think it was 12% decline in golf courses since that period. You've seen golf playership start to recover beginning in 2017 and really got some gasoline poured on that trend in 2020 and 2021 during the pandemic. when past times that you could do inside were banned, certainly a tailwind for golf. Some of the questions today are whether that bump up in demand we saw in the pandemic will be durable or whether we see a return to a trend that we saw maybe in the early 2010s.

Yeah, I know I was very grateful over the last few years to have golf as an outlet because of so many things that were going on. It was really difficult to argue that you couldn't just be outside, walking on a golf course, enjoying yourself. And so that was a great, great outlet. And I wonder, we're not going to get into the discussion of Liv. I know that Liv golf can be a very polarizing topic for many. I mean, I think we probably all have sort of opinions on both sides of the fence there. But ultimately,

the interesting point to me, in regard to this recovering of playership, right, as we see these numbers start to improve, you know, one of the arguments for Liv was that it's something that potentially could bring younger players into the game with its new format, with the players that are on that tour. So it'll be very interesting, I think, just. just to watch from that perspective, is Live golf something that ultimately does bring younger players into the game? I think first and foremost, we have to see Liv actually survive, right, and be sustainably successful. And that's another question entirely. But they're certainly given their best shot. That's right. The way I think about Liv, whether Liv succeeds or not,

it's a heck of a lot of marketing dollars being targeted at the golf demographic. And certainly, you see some success. They had a big event in Australia where it seems like lots of people turned out. And if you look at some of the figures, you had 3.3 million new golfers in 20, That's the largest number that we've seen since back in the Tiger era. And there's some significant opportunities. International growth continuing to grow places like Korea and Japan, also seeing a big growth in women's participation. So women were 37 percent of youth golfers last year.

You compare that to 2010. That was in like the 10 or 15 percent range. So certainly some new audiences coming to the game. Yeah. So let's dig into actually the businesses that are helping shape this space. Let's look at some of the bigger names in the space that are really, I think, well-known. Size does matter in this line of work. And I think it is a market where brand loyalty is certainly a factor that comes into play.

You've been looking at a couple of companies that I think are really important. And I think for investors, they would be sort of the obvious considerations, at least. Two companies in a Cushnet Holdings and Top Golf Callaway Brands. Let's go ahead and start with a Cushnet because by that name alone, some folks might not recognize it. But when you look under the hood, a Cushnet actually holds a nice, powerful portfolio of brands. That's right. You may not have heard of a Cushnet holdings, but you've certainly heard of some of the companies they own. Their ticker symbol gives you a signal of the industry there in. Their ticker symbol is golf.

It should be pretty easy to remember. But those brands are titleist, the most dominant ball on tour. I think it's all about three quarters of golfers on the PGA tour. Use the ProV-1 or one of the Titleist line of balls. They also make Titleist clubs where their driver is the most popular driver on the tour. Titleist apparel, things like that. Also control the Footjoy brand, which is the number one shoe in golf. Over 50% of the players on the tour use the footjoy shoe.

So really established brands in the industry, and that's a signal to the type of customer that a Cushnet target. A Cushnet targets the dedicated golfer, the type of guy who, you know, everybody knows a person that's like that. If they don't get their golf in that week, they're going to have a tough time. And that's a very valuable customer when you look at the golfing industry in the most recent earnings call. They laid out this kind of demographic data about the business. So if you look at golf, 15 percent of players in the golfing industry, play 40 percent of the rounds and account for 70 percent of the dollars spent in the golfing industry. Entitlest, Footjoy. Some of these brands are very much the dominant premium brands.

and those are the folks they target. If you look at the capital allocation strategy at a Cushnet, essentially we're going to milk these brands for all we've got. Over the past five years, have been significant returners of capital. I've spent $317 million on share repurchases, return another $191 million in dividends. A big part of that is the controlling shareholder. It's over 50% controlled by Fila Korea, and that's been the case since going back to 2016. And those folks have driven that capital allocation strategy towards essentially return of capital

with shareholders and some very targeted tuck-in. So this is a business very much focused on the people who are already playing golf, who are these dedicated players and they have the brands to do it. Well, I must admit, Nick, you know, I've played golf for most of my life. And I am a titleless loyalist. I mean, I have played titleless golf balls for as long as I can remember. And I got titleless wedges in my bag, even have a couple of titleless putters. And footjoy, golly, best golf shoe out there. And I won't even consider getting anything else.

So, yeah, it kind of speaks to the power of the brand for those folks who are dedicated to it and have played for a long time. But that's not to say that, you know, companies can't come in there and steal some of that market share. But I wonder, are there any red or yellow flags with a company like a Cushnet that they would give you pause or that investors should know about? Well, so I mentioned the controlling shareholder. Anytime you see kind of a big private equity type company controlling over 50% of the business, certainly worth paying attention to what's going to happen with this stake. For me, I actually am a shareholder of a Kushnet. It's not something that gives me concern. In this case, I mentioned the repurchase activity, and the Fuel

Korea business is participating in those repurchase, but they are selling pro rata with the kind of public shareholders. So if you go and buy back $100 million from folks out in the public market, they're going to buy $100 million from Fila Korea. So I don't think you see this overhang being a downward pressure on the stock, you're kind of getting the same benefits of those repurchases as the controlling shareholder is. If you have some concern about participation in golf, particularly among established golfers, that is a risk to the extent you see a slowdown in golf participation that would hurt a Cushnet, although I would say that targeting the established golfer, these are the folks that it's going to take them a little bit more to give up this hobby

than I think the typical participant and also these folks are tend to be in a more premium segment of the market. The guys that are getting custom fit clubs of title-list golf clubs, you are probably a little bit more insulated to economic downturns than the typical market participant out there. Chances are good. Chances are good. Now, next up is one, I guess it's a little bit more obvious in what this company does and the brands that it owns Top Golf Callaway. Now, this is a business has morphed a bit in recent past. And Nick, as I was singing the praises for Titleist and Footju, I got to tell you, my irons are Callaway. I got a Calaway irons and I have got an Odyssey putter.

That's Calloway. I got a little bit of representation of my bag of all of these companies. And I think it's a company that benefits from brand loyalty as well because they make really good equipment. But again, this is a business that has morphed a bit in recent past primarily because of that Topgolf part. But what is the story here with Top Golf Callaway? Well, so I mentioned how a Kushnet is certainly targeting the dedicated golfer. Topgolf Callaway, at least they're where they're looking for growth is really in the emerging golfer. And you see that? They changed their ticker symbol. Used to be L-L-L-Y for Eli Calloway,

changed it to Mod-G, M-O-D-G, kind of standing for modern golf. And you mentioned that Top-Gulf acquisition in 2021 bought that business essentially kind of a merger of equals. Today, top golf about 40% of revenue for the Caliwold. business with the remainder of revenue coming from similar golf equipment to what I laid out with a Cushnet. So Callaway drivers, they're also involved in the golf ball business. They own Travis Matthew Apparel. If you like any of those commercials that you see with the Gardens of the Galaxy guy, hyping those things up. But targeting a very different segment of the market and a very different capital allocation strategy. So as with Cushnet, lots of buybacks and dividends, no dividends or buybacks in the case of Top Golf,

Callaway brands because of that investment in new top golf locations also saw a significant increase in capital expenditure related to that. So on the plus side of that, if you want to use the David Gardner Rule Breaker language, so they own Top Golf, that is a top dog and first mover in an important emerging industry, that being this casual kind of driver bay golfing. And you're seeing some significant growth. I laid out that 15.5 million golfers last year exclusively played. in these types of locations. But in exchange for that growth, you're seeing a really significant

increase in capital expenditure to see the build out of these types of locations, just to give you some numbers there. Capax for Top Golf Calaway, expected to be $255 million in 2023, up from $55 million in 2019 before that Top Golf acquisition. So certainly lots of opportunities for growth with Top Golf as you roll out locations really across the U.S. And they really haven't really deployed in a significant way outside of North America. Certainly lots of growth opportunities there. However, lots of capital required to build out those locations, a much less mature industry, right? They haven't been, we haven't been playing top golf since the 1400s. So really some questions about, you know, how long the duration will be of this top golf trend as opposed

to traditional golfing and much more capital requirements on the upfront. So certainly some exciting opportunities, but you got to spend some money to get there. capture them. Yeah, I got to say I like that Top Golf acquisition. I mean, Top Golf, well, I was ready for it to go public. I think we were all kind of excited to see that hit the public markets because it was sort of a different way to invest in golf. I think Callaway very wisely decided to snap that up before I had a chance to really take

off. I wonder is between the Cushnet Holdings in Top Golf, Calaway, is there one company that stands out to you over another? And if so, why? For me personally, I'm more partial to the Cushnet. side of things. And that's because of, A, the capital return opportunity, you're seeing lots of cash being pushed into buybacks and dividends as opposed to, you know, lots of capital requirements on the top golf Callaway side of things. And part of what's underlying that, too,

is that demographic figure I laid out earlier. When 15% of the participants in a business account for 70% of the spending in that business and you have captured those types of golfers, you really have the segment of the market that I think is most important. I mentioned, you know, Live Golf as being marketing for golf as a whole that I think, you know, benefits Callaway and lots, excuse me, Titleist Calloway, lots of other participants, sellers of golfing equipment. I think the spending that the Top Golf Callaway is doing to bring new golfers into the game through Top Golf over the long term. Some of those are going to trickle through into that 15% addicted enthusiast golfer that I think a Cushnet is going to benefit from. So I think, you know,

A Cushnet benefits from some of the trends that Callaway is helping invest in carrying out. But as shareholders, you don't have to spend the money and you actually get that money back in the form of capital return. So I like the dominant brand in the category. I like capturing the most important segment in the category. And I like the capital allocation strategy. Yeah, kind of weird to think of golf as having switching costs there. But, you know, that dynamic exists to a degree. No question about it. Nick, before we take off here, we thought it would be fun. We both play the game.

We thought it'd be fun to offer up a quick golf tip for listeners who either play the game or are thinking of picking it up. This can be taking any direction you want, Nick, but give us a golf tip that you think is going to help. Well, I love golf, but unlike you, Jason, I would never consider myself a golf pro or someone who is any type of a good golfer. So I would just say bring some refreshments for that back nine. When you start feeling frustrated and need to take the edge off, you know, always be prepared. I was a boy scout. A little aiming fluid. Never heard. Never heard. I'm with you there. I'm with you. So I'll go a little bit on the golf side. Yeah, I do have a background.

I was a club professional for many years before I started doing other things in life. And so I taught a lot. And, you know, one of the drills I still like, even to this day for me and for other folks, it's actually hitting balls with your feet together. And I mean, your feet literally touching, like you're standing in there with your feet touching, then hitting golf balls. And what it does, it promotes a good turn, right? I think in golf, you really hear that a lot, turn your body. It promotes turning as opposed to laterally swaying. It promotes really good balance.

And the best part of this drill, you get immediate feedback, and you don't need anyone else to tell you. Because if you lose your balance, well, there you go. You're not turning. You're swaying. And the whole idea is to turn. So if you lose your balance, you're moving laterally, that's not. You start with little half swings, move on up to full swings. I think you'll be amazed at how well you can actually hit the golf ball this way.

Once you've got that motion down, you just go to the driving range, hit five balls normally, hit five balls with your feet together, just kind of alternate back and forth. It's a great drill you can do really for the rest of your golf life to promote good balance and a good turn. So that's what I got for you, Nick. Listen, this has been a lot of fun. Thanks so much for taking the time to join today. Always happy to be here with you, Jason.

As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buy ourselves stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.