Morgan Stanley launched coverage on Acushnet Holdings, the parent of Titleist and Footjoy, with an “Equal-Weight” rating as Acushnet’s recent growth momentum is seen priced into its valuation. Analyst Brian Harbour said Acushnet has “unique advantages in consumer discretionary and longer-term upside if golf tailwinds endure.”
In a note, Harbour favorably cited Acushnet’s strong management team, category-dominant brands, high-end positioning, and supply chain expertise.
He wrote, “Many features of the business check key boxes in a more uncertain consumer environment, in our view — heritage brands with leading share and proven innovation capabilities, a dedicated and higher-end customer base, a long-tenured management team, substantial domestic production in key markets, a low leverage and highly cash generative model that returns excess capital, reasonable valuation, and exposure to potential longer-term demand tailwinds in the golf market, where we see reasons to be optimistic.”
The analyst noted that Acushnet’s guidance calls for growth of 2.7 percent to 5 percent for the current year, excluding currency impact. Currency-neutral sales grew 30.6 percent in 2021. Harbour believes Acushnet has “multiple avenues” to achieve its guidance, including pricing, improving inventory levels, new club and ball launches, an ongoing demand backlog for clubs and certain drivers of rounds played that should help Acushnet reach its guidance.
From a valuation standpoint, Harbour noted the stock was “a COVID beneficiary” as the stock surged in the earlier stages of the pandemic. The stock is now off about 30 percent over the last six months, directionally similar to peers but less in magnitude, with valuation now on “par” with pre-COVID levels. As a result, Harbour believes the stock is “fairly valued” as top-line growth returns to normalized, modestly positive levels.
Harbour sees a chance for upside for Acushnet if golf rounds played and pent-up demand for equipment exceeds expectations
Indeed, Harbour said golf’s longer-term prospects post-COVID would influence the stock, and “we see some reasons for optimism,” including new golfer count rebounding and eclipsing the prior peak in 2000, according to NGF (National Golf Foundation). Rounds played growth turned positive in 2019, averaging 16 percent growth in 2020 versus 2019, with 2021 showing 22 percent growth versus 2019.
Off-course golf (i.e., Topgolf, simulators, driving ranges) has also proliferated and draws in more diverse users who may eventually play on courses.
“Whether this is the start of a new trend or a short-term bump is heavily debated and will take time to answer, but besides the points noted, we’d also highlight that country club demand is exceptionally high today, work from home and post-COVID trends favoring the suburbs and golf-friendly cities should free up time for golf, and millennials, who may increasingly adopt some of their parents’ habits, will be aging into prime golf-playing and club-joining years over the next decade (the largest cohort of millennials turns 40 in 2030),” wrote Harbour.
On the downside, risks include higher input costs or a softer consumer environment in the second half of 2022. Harbour concluded, “A steady track record of earnings growth should continue, and longer-term, whether the new demand for golf holds up will influence the stock. We expect concern about goods spend reversion (in ’22 but also ’23) to remain an overhang in the near term but think customer exposure, consumables sales, and more modest expectations work in GOLF’s favor relative to some comparable stocks.”
Morgan Stanley set a price target of $48. On Monday, shares of Acushnet closed at $41.46, up 85 cents.
Photo courtesy Acushnet/Titleist
