Activist investment firm Jana Partners (Trades, Portfolio) disclosed a 9.2% stake in Callaway Golf Co. (ELY, Financial) on Thursday.
Founded in 2001 by Barry Rosenstein, the New York-based firm takes a value-oriented, event-driven approach to picking stocks, often taking activist positions in order to help unlock value for shareholders.
According to GuruFocus Real-Time Picks, a Premium feature, the firm invested in 8.67 million shares of the Carlsbad, California-based sporting goods company on June 3, dedicating 10.96% of the equity portfolio to the stake. The stock traded for an average price of $14.86 per share.
The company, which manufactures and sells golf equipment, accessories and other golf lifestyle-related products, has a $1.71 billion market cap; its shares were trading 13.77% higher at $18.09 on Thursday morning with a price-earnings ratio of 19.58, a price-book ratio of 2.43 and a price-sales ratio of 1.29.
The Peter Lynch chart shows the stock is trading higher than its fair value, suggesting it is overpriced.
In a Securities and Exchange Commission filing, Jana said it plans to encourage Callaway to sell all or part of its business as it has continued to underperform despite its successful innovation and durable market share in the core golf industry.
The firm said it also “intends to have discussions with the [company’s] board of directors and management regarding the Issuer’s portfolio composition; strategic alternatives including exploring a sale of the Issuer or asset divestitures; capital allocation and acquisition strategy; operating performance and cost management; and governance.”
In early May, Callaway reported record first-quarter revenue of $516 million, which was up from $403 million in the prior-year quarter. It also posted earnings of 63 cents per share, which was a decline of 2 cents from a year ago.
Callaway Golf’s financial strength and profitability and growth were both rated 5 out of 10 by GuruFocus. Although the company has issued approximately $623.27 million in new long-term debt over the last three years, it is at a manageable level as a result of adequate interest coverage. The Altman Z-Score of 2.14, however, indicates it is under some fiscal pressure as the company has recorded a loss in operating income over the last three years.
The company is also supported by margins and returns that outperform at least 60% of competitors. Additionally, Callaway has a moderate Piotroski F-Score of 4, which suggests operating conditions are stable, and a business predictability rank of one out of five stars. GuruFocus says companies with this rank typically see their stocks gain an average of 1.1% per year over a 10-year period.
Jana is now Callaway Golf’s second-largest shareholder behind BlackRock, which has a 13.9% stake. As of the end of the first quarter, other top guru investors included Mariko Gordon (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Joel Greenblatt (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Chuck Royce (Trades, Portfolio) and Jeremy Grantham (Trades, Portfolio).
Portfolio composition
Jana’s $1.05 billion equity portfolio, which was composed of 9 stocks at the end of the first quarter, was heavily invested in the consumer defensive sector with a 39.64% weight, followed by smaller positions in the health care, consumer cyclical and industrials spaces.
Its five largest holdings as of the end of the quarter were Conagra Brands Inc. (CAG, Financial), Zimmer Biomet Holdings Inc. (ZBH, Financial), HD Supply Holdings Inc. (HDS, Financial), Tiffany & Co. (TIF, Financial) and the SPDR S&P 500 (SPY, Financial) exchange-traded fund.
Disclosure: No positions.
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