Schaeffer's 43rd Anniversary Stock Picks in 2024

Is It Time to Take a Swing at Callaway Stock?

Callaway Golf is expected to report earnings on Feb. 8

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To start 2022, Callaway Golf Company (NYSE:ELY) was named a "top pick" at Compass Point, but soon went by way of the broad-market pullback, losing 12% since the start of the year. Plus, in the following months, at least two analysts issued price-target cuts, most recently from Cowen to $26 from $30. Last seen trading at $24.07, does ELY now have an attractive entry point? 

Callaway is gearing up for its fourth-quarter earnings report, due out on Tuesday, Feb. 8. The security has had a mixed history of post-earnings moves in the past two years, settling higher after just three of these sessions, including a 13.2% jump last May. This time around the options pits are pricing in a next-day swing of 11.5% which is much bigger than the 5.5% move the security averaged after its past eight post-earnings sessions. 

Options players have rarely been more bearish ahead of the event. The stock's Schaeffer's put/call open interest ratio (SOIR) of 1.29 sits higher than 99% of readings from the past year, implying short-term options traders have rarely been more put-biased. 

Echoing this, 2.20 puts have been picked up for every call at the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). This ratio stands in the 96th percentile of its 12 month range, meaning long puts have rarely been more popular among these traders. An unwinding of some of this pessimism could give the golf stock a much-needed boost after earnings.

Despite the price-target cuts we mentioned earlier, ELY remains an analyst favorite. Of the 11 in coverage, 10 call it a "buy" or better, while just one says "hold." Plus, the 12-month consensus price target of $40.33 is a 67.3% premium to current levels. 

From a fundamental point of view, Callaway stock’s valuation is undeniably on the pricier end. Although ELY's price-sales ratio of 1.26 is a fair value, its forward price-earnings ratio of 51.55 is very high for a company operating in the sports equipment and entertainment industry. Callaway Golf Company also has a relatively weak balance sheet with just $508.18 million in cash and $2.67 billion in total debt.

Moreover, Callaway has struggled to generate consistent growth on the bottom line. Between fiscal 2018 and fiscal 2020, its net income decreased by more than $230 million, with ELY reporting $126.9 million in net losses for fiscal 2020. However, the golf-centric company has since returned to profitability, increasing its net income by $434.5 million and generating $307.6 million in net profits over the past 12 months. In addition, Callaway has produced strong revenue growth in recent years, growing 125% since fiscal 2018. ELY is also estimated to see a 7.35% increase in earnings and a 18.3% increase in revenues for fiscal 2022.


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