Fore! Golf stock may surge by 60%

Published Mon, Apr 20 20159:16 AM EDT

A new Wall Street report calls for a 66 percent jump in this golf stock over the next 12 months. Americans, especially younger people, are playing more golf and spending more on equipment as the economy strengthens, which should drive a rally in the shares. Callaway Golf (ticker ELY) shares will jump to $16 from Friday's close of $9.65 as players flock to the brand leader in the middle of a company turnaround, according to Jefferies analyst Randal Konik, who put out a thorough report Monday on the state of golf in America. Golf industry is stabilizing. …Our work around golf course supply/demand shows a healthier outlook ahead while absolute rounds played trends are beginning to stem declines. In fact, rounds played per day open (accounting for weather) showed a recent positive inflection while participation rates have started to stabilize as well. These metrics show a bottoming industry which should lead to a positive inflection in equipment sales where we see ELY as a primary beneficiary. Jefferies looked at rounds played per day using PGA performance track data and found that golf play was up by 1 percent last year, stemming a decline that began around 2000 at the top of the dotcom bubble. The firm also found that the average annual golf-related spending jumped to $2,057 for the private club player and $634 for the public course player. And private club players are getting younger: While a significant number of current members joined clubs between the ages of 30 and 45, today's "qualified member prospects" (defined by the NGF as those who express a high level of interest in joining a golf club, have incomes > $100,000 and are between ages 30 and 60) include a large number of 45 – 60 year olds. The implication here is that baby boomers represent an important demographic in the future of golf. Overall, there is a large population of potential members between the baby boomers and a younger generation of golf enthusiasts (48% of US golfers are younger than 40 years old). Golf is not just for "old" people, and Callaway is well-positioned to win the business of new golfers across the spectrum of age groups." It doesn't get any more cyclical or inelastic than golf equipment, and now that wage growth is finally picking up so should sales for the maker of Bertha drivers and Odyssey putters, according to Jefferies. Read More Buy Google here? Charts of the week Behind the analyst's valuation forecast are expectations for cash flow to more than double to $71.2 million in 2016. Applying a 14 times cash flow multiple to that figure and adding in $4 for a minority stake in the TopGolf sports entertainment facilities gets the analyst to the $16 price target. Callaway, known more for its clubs, has always had trouble with the golf ball market, according to Jefferies, but that is changing. Going forward, we are very optimistic on Callaway's opportunity to gain share of the Golf Ball market especially now that the company has regained lost Green Grass distribution and has introduced a new Chrome Soft technology, which offers low compression without compromising distance. Though still in early days, the Chrome Soft golf ball is already gaining meaningful traction with Tour players and presents a favorable revenue catalyst in the near term. And as a result, Callaway is steadily taking market share. The company's share of golf sales was 13.9 percent three years ago, but that's surged to 19.1 percent market share today, according to Jefferies. It's a comeback story on the back nine for the company as this is the same market share Callaway held in 2007.

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A new Wall Street report calls for a 66 percent jump in this golf stock over the next 12 months.

Americans, especially younger people, are playing more golf and spending more on equipment as the economy strengthens, which should drive a rally in the shares.