This deep value golf stock is set to triple, Jefferies predicts

Published Fri, Nov 4 20229:29 AM EDTUpdated Fri, Nov 4 20229:48 AM EDT

After a topline beat and raised fourth-quarter forecasts, there's big growth ahead for Topgolf Callaway , Jefferies says. While reiterating the stock as a buy, analyst Randal Konik boosted the price target to $56 – a 221% upside over the stock's last close. "MODG is a beat & raise and record results story on repeat. [Management] has proven itself and this is a compelling ecosystem with balanced growth, strong and rising margins, and an accelerating cash flow," he said in a note to clients. "The sport of golf is healthy, Topgolf is gaining massive share, and apparel brands are in early innings. The market won't be able to ignore these strong fundamentals for much longer, so asymmetric stock upside is ahead, in our view," he said. Long considered a sport for the wealthy or business executives, golf experienced an image change during the pandemic. The spaced-out, mainly outdoor sport became in vogue as it was perfect for social distancing requirements. But unlike other pandemic winners in the sports space like Peloton , it is not feeling any whiplash from falling demand or weak financials, according to Jefferies. Topgolf Callaway's third-quarter sales were up 15% from a year ago to $989 million and above estimates of $945 million. Konik said he liked these results and the fact that the company raised its outlook again for the full year. According to Konik, the guided 2023 sales growth of 10% with an adjusted EBITDA of $600 million is "conservative" and the company will likely beat it — a pattern for the company. Topgolf has a number of difference business lines from apparel to equipment, and it is expanding in the corporate events space, in-person stores and direct-to-consumer offerings. Konik said this growth will be supported for the next several decades by a growing market, as beginners in the sport reach an all-time high due to continued workplace flexibility coming out of the pandemic. He expects the $800 million target for adjusted EBITDA by 2025 also is achievable – saying the company could beat it by $200 million – even if there is a pullback in golf equipment sales as its apparel business is surging. At a time when there is a growing crop of companies revising or pulling their guidance amid tough economic conditions, Topgolf could stand out for continuing to beat and raise its estimates. However, the stock has lost about 36.5% from the start of 2022, and has performed worse than the S & P 500 , which is down 20.2%. On Friday, the stock was up more than 5% in trading. To be sure, Konik said the company was hit by foreign exchange headwinds that could amount to 300 basis points or $65 million total in sales growth and adjusted EBITDA in 2023 if current rates persist. But Konik noted that this is not an issue unique to Topgolf Callaway as the surging U.S. dollar has bitten into performance at other multinational companies. Attracting talent could also be a challenge, like it has been for other manufacturers and entertainment venues, Konik said. He emphasized the need to create positive work environments to "remain competitive." — CNBC's Michael Bloom contributed to this report.