DA Davidson raised its price target for Sportsman’s Warehouse due to the tax change and improving underlying trends as well as Callaway Golf due to its Topgolf investment.
For Sportsman’s Warehouse, DA Davidson reiterated its “Buy” rating and raised its price target to $8.00 from $6.50.
Andrew Burns, the investment firm’s lead analyst in the space, said several positive factors, including the U.S. retail climate showing improvement over the holiday period, the anniversary of the surprise presidential election that weakened demand for firearms, and the new 21 percent corporate tax rate.
Burns raised his estimates to reflect the new corporate tax rate. The retailer raised its earnings estimate for 2018 to 70 cents a share from 58 cents and increased its estimate for 2019 to 78 cents.
The lower tax rate is expected to improve cash flow and help Sportsman’s Warehouse more quickly pay down debt. The firm had slowed its expansion to improve its debt position. Continued pay downs are expected to help Sportsman’s Warehouse end 2018 with a “very manageable debt load,” he wrote.
Comps are expected to sequentially improve next year, including negative comps in the first half, followed by flat comps in Q3 and a positive comp in Q4. Besides an improving retail climate and easier comparisons, a lessening of competition in the marketplace, and improvement in regions that had been impacted by the downturn in oil is expected to support the gains.
“After a challenging 2017, we expect a 2018 recovery to validate SPWH’s unique low-cost, small format store model and renew investor interest in long-term unit growth potential,” wrote Burns. “As comps stabilize, debt is reduced and earnings growth resumes, we expect shares to appreciate.”
For Callaway Golf, Burns reiterated his “Buy” rating and raised his price target to $18 from $17 as another round of financing for Topgolf showed that Callaway’s investment in the golf driving range and entertainment complex continues to appreciate strongly.
According to a regulatory filing, Callway invested an additional $20 million in Topgolf, bringing its total investment to $70.5 million on a cost basis. Callaway estimated its 14 percent stake in Topgolf is valued at $290 million. That implies an overall Topgolf valuation of $2 billion, representing a 50 percent appreciation since a February 2016 investment by Providence Equity.
The Fidelity-led investment round, which closed on December 26, suggests that an IPO for Topgolf isn’t likely in the near future although it’s been widely speculated. Wrote Burns, “With that being said, this news should still be a positive catalyst for ELY shareholders as Topgolf continues to appreciate in value and its growth trajectory appears intact.” Topgolf is projected to generate 13 million guest visits in 2017 compared to 10.5 million in 2016.
The “Buy” rating is also supported by Callaway’s underlying improving performance. Wrote Burns, “We believe ELY’s product momentum, improving profitability, recent acquisitions and potential additional Topgolf appreciation will drive share price outperformance in the coming quarters.”
Photo courtesy Sportsman’s Warehouse
