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Callaway Golf Company (ELY) Ticks Down Ahead of Earnings: What To Expect

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Shares of Callaway Golf Company (ELY - Free Report) ticked down 0.2% during regular trading hours Wednesday, a day before the recreational goods company releases its latest quarterly earnings report. U.S. stocks were mixed on the day, and Callaway was no different, losing as much as 2.1% before settling at near-opening levels.     

ELY shares have gained over 50% in the past year as the firm continued to expand its golf-related good offerings. Callaway holds the largest market share of the golf industry and has seen strong demand in its TravisMathew apparel business, which it acquired in August of last year. Moreover, Raymond James notes that Callaway’s “Rogue” line of irons, drivers, and fairway clubs have been quite successful, with multiple off-course retailers claiming that Rogue is currently their best-selling golf club.

Raymond James also highlighted that Q2 is the most important period for the golf industry, and accounts for 30% of Callaway’s annual sales, along with 57% of annual operating profit. But what should we expect from its soon-to-be-reported quarter? Let’s take a closer look.

Earnings Outlook

Callaway will release its Q2 fiscal 2018 results after the market closes on Thursday. Here’s what analysts are expecting, according to our Zacks Consensus Estimates:

Earnings: ELY is projected to report earnings of $0.47 per share, which would represent about 38.2% growth from the year-ago period.

Estimate Revisions: ELY has seen limited estimate revision activity in the past 60 days. While no recent changes have been made for the current quarter, the firm has seen one positive revision for next fiscal year.

Revenue: Consensus estimates have ELY’s Q2 revenue pegged at $370.87 million. This would mark growth of 21.8% year over year.

Valuation

ELY is trading at 22.6x forward 12-month earnings heading into today’s report. This is a notable premium compared to the “Leisure & Recreation” industry’s average of about 15.5x, but is “cheaper” than the stock has been in recent years.  

Over the past year, ELY has traded as high as 31.6x and as low as 20.7x. Its 52-week median earnings multiple is 24x.

Bottom Line

Callaway’s recent success on the back of solid acquisitions is a welcome trend, but investors should note that as the #1 company in the golf space, there isn’t much space for organic growth. However, if the firm can continue to make solid acquisitions, it could remain a compelling investment opportunity.

ELY shares are up over 50% in the past year, so some investors may want to realize their gains instead of risking an earnings play. Analyst revision activity for the quarter has been muted, but ELY has a Zacks Earnings ESP (Expected Surprise Prediction) of 0.94%.

A positive Earnings ESP paired with a Zacks Rank #3 (Hold) or better ranking helps us feel confident about the potential for an earnings beat. In fact, our 10-year backtest has revealed that this methodology has accurately produced a positive surprise 70% of the time.

Given the stock’s current Zacks Rank of #2 (Buy), this Earnings ESP value leaves us optimistic about ELY’s chances at beating estimates going into this afternoon’s report. It is also worth noting that that Callaway has outperformed analyst expectations in 14 of the last 15 quarters.

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