Callaway Golf Co (ELY): Unconventional Consumer Confidence Benefactors

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Callaway Golf Co (NYSE:ELY)Looking for a alternative, perhaps unconventional, consumer confidence benefactor?

The Conference Board released the most recent consumer confidence statistics for the month of May last week. Economists were expecting a modest increase in consumer confidence from the month of April with a reading of 71. The numbers hit the wires far above economist expectations with a reading of 76.2 in the month of May and upward revisions to 69 for the month of April.

The futures market immediately priced in the announcement which sent the broad market roaring higher. The reading of 76.2 represents the highest level of consumer confidence in the last five years. The rise in confidence can be attributed to a stronger housing market, rising stock market, lower than expected fears of inflation, and increased optimism regarding the employment market.

This release got me thinking about some unconventional industries which would perform well as confidence rises. Being an avid golfer myself, I realized that the golfing industry, which had been hit hard during the economic slowdown, should perform well during the economic recovery. Below, I would like to highlight some companies I expect to do well as consumer confidence rises and the housing recovery continues.

Following Mickelson

One of the iconic golf brands on the market, Callaway Golf Co (NYSE:ELY), has under performed the broad market this year, up only 5% year to date. My two part investment thesis behind Callaway Golf Co (NYSE:ELY) is simple and logical. First, Callaway Golf Co (NYSE:ELY) stands to do well as golfers trade up their aging equipment purchased pre-recession. Golf sales were hit hard during the recession as consumers could not afford the high price tags of new equipment. During this time, equipment wore out, sales slumped, and technology innovation continued. Amateurs with cash in hand, will now look to upgrade their out of date sets.

Second, as the housing market recovers and consumers shift from renters to buyers, it is likely consumers will be more inclined to sink the costs associated with a golf membership. More rounds of golf equals more revenues for Callaway Golf Co (NYSE:ELY) as grooves are worn out and balls are lost. In addition to these above catalysts, the company has greatly improved its manufacturing processes. Last month, the company announced it improved its assembly labor costs by 45% and its golf ball manufacturing productivity by 49% year over year. This improvements should translate into higher margins and earnings in the years ahead.

Lets take a look at some positives from the company’s first quarter earnings. I was pleased to see the company gaining market share both domestically and in major markets internationally. Market share rose from 12.6% to 13.4% in the U.S. market while rising from 10% to 12% in the key Japanese market. Management believes the company will continue to regain share throughout the remainder of the year on the back of a strong product pipeline. As a result of this growth, the company was able to grow revenues 7% on a year over year basis. Golf ball sales increased 22% to $43 million as a result of increased demand for mid-tier options. While not the high end, I think rising golf ball demand is a leading indicator to hard product growth.

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