Investment firm Jana Partners (Trades, Portfolio) revealed late last week it pared its stake in Callaway Golf Co. (ELY, Financial) by 8.11%.
The New York-based firm, which was founded in 2001 by Barry Rosenstein, takes a value-oriented, event-driven approach to picking stocks, often entering activist positions in order to help unlock value for shareholders.
Having already slashed the position by 17.32% in the first quarter, GuruFocus Real-Time Picks, a Premium feature, showed the activist firm sold another 527,052 shares of the Carlsbad, California-based sporting goods company on June 5, impacting the equity portfolio by -1.06%. It now holds around 5.97 million shares. The stock traded for an average price of $17.37 per share on the day of the transaction.
GuruFocus estimates the firm has gained 0.59% on the investment since establishing it a year ago in the second quarter of 2019. Callaway now represents around 12.16% of Jana’s equity portfolio and was its fourth-largest holding as of the end of the first quarter.
The company, which manufactures and sells golf equipment, accessories and other golf lifestyle-related products, has a $1.49 billion market cap; its shares were trading around $15.02 on Monday with a price-earnings ratio of 24.62, a price-book ratio of 1.89 and a price-sales ratio of 0.88.
The Peter Lynch chart shows the stock is trading above its fair value, suggesting it is overpriced. The GuruFocus valuation rank of 4 out of 10 aligns with this assessment.
On May 7, Callaway reported first-quarter earnings of 30 cents per share on $442 million in revenue, which were consistent with its previous projections.
In a statement, President and CEO Chip Brewer said Callaway’s market share during the quarter remained strong “despite the negative impact of Covid-19.”
“In fact, through early March we were on track for another record sales year, which would have made it our fourth consecutive record year,” he added. “While the Covid-19 pandemic will have a significant impact on our results in the short-term, we believe we will be well positioned to emerge from this pandemic. Our golf and outdoor lifestyle businesses support an active and healthy lifestyle that is compatible with a world of social distancing. We are also pleased that we are beginning to see some signs of recovery, particularly in those regions that were first affected.”
The company also announced it completed the issuance of 2.75% Convertible Senior Notes, which are due in 2026, on May 4. It raised net proceeds of $250 million.
GuruFocus rated Callaway’s financial strength 4 out of 10. As a result of issuing approximately $732.13 million in new long-term debt over the past three years, the company has weak interest coverage. The Altman Z-Score of 2.09 also indicates the company is under some pressure since its assets are building up at a faster rate than revenue is growing and the Sloan ratio indicates it has poor earnings quality. The weighted average cost of capital also surpasses the return on invested capital, implying it spends more money than it makes.
The company’s profitability fared a bit better, scoring a 6 out of 10 rating on the back of an expanding operating margin, strong returns that outperform over half of its competitors and a moderate Piotroski F-Score of 5, which means business conditions are stable. Callaway Golf also has a business predictability rank of one out of five stars. According to GuruFocus, companies with this rank typically return an average of 1.1% annually over a 10-year period.
Despite the reduction, Jana is still the company’s largest guru shareholder with a 6.34% stake. Other top gurus who are also invested in the stock are Steven Cohen (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Chuck Royce (Trades, Portfolio), John Hussman (Trades, Portfolio), Prem Watsa (Trades, Portfolio), Caxton Associates (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio).
Portfolio composition
As of the three months ended March 31, Jana had nearly 40% of its $862 million equity portfolio, which consisted of 11 stocks, invested in the consumer defensive sector.
The firm’s top five holdings as of the end of the first quarter were Conagra Brands Inc. (CAG, Financial), Perspecta Inc. (PRSP, Financial), Hillenbrand Inc. (HI, Financial), Callaway Golf and the SPDR S&P 500 exchange-traded fund (SPY, Financial).
Disclosure: No positions.
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