5. Topgolf Callaway Brands Corp. (NYSE:MODG)
Average Upside Potential: 32.52%
Number of Hedge Fund Holders: 17
Topgolf Callaway Brands Corp. (NYSE:MODG) is a global sports equipment manufacturer specializing in golf products, including clubs, balls, and accessories like bags and gloves. It operates through 2 main segments: Topgolf, which offers technology-driven golf entertainment with interactive driving ranges and social spaces, and Golf Equipment, featuring renowned brands such as Callaway Golf, Odyssey, and OGIO. Committed to expanding its reach, it caters to golfers of all skill levels through innovative products and engaging experiences.
The Topgolf segment continues to be a significant growth driver, with Q2 2024 revenue up 5% and operating income increasing by 27.5%. This demonstrates the segment’s resilience and operational efficiency, even in the face of macroeconomic challenges. The company aims to expand this segment to 250 locations, driving future growth.
While the Callaway Golf segment experienced a decline in equipment sales, primarily due to last year’s successful Big Bertha launch, the brand’s strong reputation and the enduring demand for premium golf equipment suggest a recovery is on the horizon. It holds the top position in golf clubs and the second position in golf balls.
It’s making significant strides in its digital strategy, particularly for its Topgolf brand. The focus on digital business is evident in its increased digital sales penetration, which rose to 35% in Q2 2024. By investing in technology, talent, and data analytics, it aims to further enhance its digital capabilities and drive growth in the future.
The company presents a compelling investment opportunity, backed by its diverse portfolio of brands and strong financial performance. With a diverse portfolio spanning entertainment, sports, and lifestyle markets, Topgolf Callaway Brands Corp. (NYSE:MODG) is well-positioned for long-term growth. Despite short-term economic pressures, its strong fundamentals and strategic initiatives make it an attractive investment choice.
Polen U.S. Small Company Growth Strategy stated the following regarding Topgolf Callaway Brands Corp. (NYSE:MODG) in its fourth quarter 2023 investor letter:
“Topgolf Callaway Brands Corp. (NYSE:MODG) was created in 2021 with the merger of Callaway, a longstanding and slower-growing collection of high-quality golf brands, and Topgolf, an emerging sports and entertainment company. We spent over a year researching Topgolf Callaway as we sought to gain comfort with the level of earnings post-pandemic (golf popularity increased significantly and the Topgolf operating model. Importantly, we believe the Topgolf business model has significant room for growth both in units and in unit-level profitability. At the same time, the core Callaway brands provide ballast and cash flow to be reinvested to drive future growth. Beyond stores/units, Topgolf Callaway has invested in great brands and golf technology that we believe will create additional runways for growth. While the company is profitable, earnings have been under pressure over the past year. However, we believe they will reach an inflection point based on business mix and growth in Topgolf sometime in FY24, before growing at a consistent low-to-mid teens rate driven by store/unit expansion.”
