Topgolf Callaway Brands: teed up for a birdie

Jonathan Boyar, director of Boyar Value Group and advisor to the MAPFRE AM US Forgotten Value Fund

Topgolf Callaway Brands Corp. (NYSE: MODG) is a unique combination of a traditional golf equipment powerhouse and a modern entertainment company. The company consists of Callaway’s high-quality golf equipment and apparel brands, but it also includes an entertainment business through Topgolf. This dual structure has made the company difficult for investors to value.

Since hitting a high of $37 a share in 2021, MODG’s stock has fallen to roughly $10—a decline of over 70%. This sell-off has been driven primarily by the underperformance of Topgolf’s entertainment venues, which have faced weaker-than-expected same-venue sales as consumers and corporate customers pull back on discretionary spending in a more challenging economic environment. As a result, many investors have soured on the stock, believing that Topgolf’s growth prospects were overestimated. But at current levels, the market seems to be assigning almost no value to the Topgolf entertainment concept. Investors are effectively acquiring a high-quality golf equipment business at an attractive valuation and receiving the Company’s Topgolf business (which was acquired in 2021 for ~$2.5 billion) for free.

This setup offers a compelling opportunity: an inexpensive way to gain exposure to Topgolf’s potential rebound while purchasing Callaway’s well-established and profitable equipment business at a more than reasonable price. This as well as a potentially catalyst on the horizon is why we have made MODG a significant position in the Mapfre US Forgotten Value Fund.

What exactly is Topgolf?

Topgolf is an entertainment business that combines elements of a driving range, sports bar, and event space. It features multi-level venues where guests can play interactive golf games using microchipped golf balls that track distance and accuracy, making it a blend of casual sport and social activity. The company’s venues also serve food and drinks, making them popular for corporate events and social gatherings. With over 100 locations worldwide, Topgolf is a leader in its niche, offering a unique mix of sports and entertainment. However, it has struggled recently due to weaker corporate bookings and a more cautious consumer environment, leading to disappointing financial performance.

A "free" call option on Topgolf

At its current valuation, MODG’s stock price suggests that the market sees almost no value in Topgolf’s long-term growth potential. With shares trading around $10, the company is being valued primarily for its core equipment business, while Topgolf is essentially being valued at zero cost. CEO Brewer and other insiders have been bullish on the shares having purchased shares in late 2023 at around $10 following the release of disappointing Topgolf results.

The core equipment business: steady and strong

While Topgolf’s challenges have captured most of the headlines, Callaway’s traditional golf equipment business continues to perform well. Known for its top-quality golf clubs, balls, and accessories, Callaway remains a leader in nearly every major product category. The equipment business generates consistent cash flow, and Callaway’s Chrome Soft golf balls have gained substantial market share, adding a recurring revenue stream to its portfolio.

We believe that investors are underappreciating MODG’s traditional golf equipment business. Peer Acushnet (a stock also owned by the Mapfre US Forgotten Value Fund), which is a pure play golf equipment company via its Titleist and FootJoy brands has seen its stock surge ~150% since March 2020, significantly outperforming MODG, which has increased only ~20% over the same period. This disparity underscores the potential value that could be unlocked if Callaway were to be valued solely as a golf equipment company, without the overhang of Topgolf’s near-term challenges.

Valuation disconnect: hidden value in equipment and lifestyle brands

Callaway’s equipment and apparel businesses are highly valuable on their own. The equipment segment generates consistent cash flow, driven by premium products that cater to a dedicated and growing customer base. Golf participation rates remain elevated post-pandemic, with U.S. rounds played up 2% for the first half of 2024 (following a very strong 2023). This trend bodes well for Callaway’s future equipment sales and profitability

Then there’s the Active Lifestyle segment, which includes brands like TravisMathew and Jack Wolfskin. TravisMathew, known for its golf-inspired lifestyle apparel, has been a standout performer. Since being acquired by Callaway in 2017, the brand has grown from $61 million in revenue to nearly $300 million in 2023. Management sees a clear path to $500 million and has even floated a $1 billion revenue target in the long term.

Strategic review: a path to unlock value?

The market’s pessimism has prompted MODG’s management to launch a strategic review of its Topgolf segment. While there are no guarantees, management has recently concluded that spinning off a large stake in Topgolf could unlock a meaningful amount of shareholder value. Despite its current challenges, there are significant growth opportunities for Topgolf including a large addressable global market that could support ~500 venues (vs. ~100 currently).

Such a move would likely highlight the disconnect between MODG’s market price and the value of its individual businesses. For investors, the upcoming separation (or even sale) of Topgolf represents a potential catalyst that could unlock value, even if the current market environment remains uncertain. As things stand, Callaway’s equipment business alone is arguably worth more than the entire current enterprise value, meaning any positive developments at Topgolf should be pure upside.

Final thoughts: an asymmetric opportunity

MODG’s stock may be down, but it’s far from out. The market’s focus on the near-term disappointments at Topgolf has overshadowed the strong, stable cash flows of its equipment business and the growth potential of its Active Lifestyle brands. With Topgolf essentially being given away for free at the current share price, there’s a clear asymmetric opportunity for investors willing to take a long-term view.

While there is certainly risk, the upside potential—driven by the equipment business’s strength and any rebound in Topgolf—makes MODG a compelling option for patient investors. As management pursues a Topgolf separation pursuant to its strategic review, the stock could be poised for a meaningful re-rating if Topgolf’s value can be unlocked. Until then, the opportunity to buy Callaway’s world-class equipment business at a discount with a free call option on Topgolf’s recovery should be enough to catch the eye of investors.