Description Thesis
Shorting “COVID winners” has proven a fruitful approach in recent years. While many companies that temporarily over-earned have since come back to earth (ZM, PTON, TDOC, CLX, etc.), some companies continue to enjoy elevated stock prices amidst extended periods of over-earning.
For these companies, the “fall” remains ahead. I believe Acushnet is one of them.
My thesis is that Acushnet benefited during and after COVID from a double-tailwind that is now beginning to end. As the thesis plays out, I see downside to $45/share vs. a current share price close to $70/share.
Business
Acushnet is a leading supplier to the golf industry. The company owns a number of well-known golf brands, with its flagship Titleist brand supported by Pinnacle, FootJoy, Scotty Cameron, and Vokey Design.
GOLF’s revenues are split roughly in thirds across (1) golf balls, (2) equipment, and (3) footwear and apparel.
From a margin perspective, EBIT margins have historically averaged around 15% for golf balls, 10% for equipment, and in the high-single-digits for footwear and apparel.
Golf balls – the most profitable category – is boosted by the Titleist Pro V1 golf ball, which has been the top selling golf ball in the sport since 2003. More recently, Acushnet has seen its market share in golf balls modestly decline under competitive threat from Callaway and TaylorMade, although the company continues to retain its #1 position.
Since the end of the Tiger Woods era, golf as a sport was in structural decline until COVID. From 2000 to 2019, the number of rounds played in the US fell from ~520M to just ~440M. The number of golf courses shrank on average 1-2% per year, and the number of active golfers fell from ~30M to ~24M as golf participation rates declined at an even faster rate (due to overall population growth). All this happened despite an aging population that in theory should have boosted interest in the sport.
GOLF shares have historically traded for around 9-10x EBITDA, reflecting the company’s leading brands and solid operating margins amidst a challenging structural outlook for its sport.
Tailwind #1: Margin Expansion Due To Supply Chain Issues
The first leg to my thesis is margins.
As with many other parts of the economy, the golf industry faced supply chain issues during COVID. As a result, golf balls – and especially golf equipment – fell into shortage.
I track a proprietary data set of used golf equipment prices. For a period of time during COVID, used golf club prices actually were priced at a premium to new golf clubs, as new equipment was on backorder and would not arrive for weeks or months.
Supply chain issues, and higher prices for used equipment, created a “price umbrella” for equipment manufacturers to push margins higher. Since the start of COVID, equipment EBIT margins are up ~600bps and golf ball EBIT margins are up ~300bps.
I think these margins are unsustainable, and are likely to reverse.
The proprietary data set of used equipment prices that I track has mean-reverted lower back to historical levels. In my experience across consumer industries, used pricing leads new pricing. I expect this to be true for golf equipment and golf balls too.
Importantly, with the price umbrella gone, we are already seeing golf manufacturers struggle to raise price. The new Pro V1 golf balls for 2025, for example, are priced at the same level as the last new Pro V1 release in 2023.
With pricing power gone, and the supply/demand balance normalized, I believe Acushnet’s EBIT margins on equipment and golf balls are likely to mean-revert lower as well.
Tailwind #2: Golf Rounds Played
The second leg to my thesis is rounds played.
During COVID, golf was perceived as an attractive socially-distanced sport. After COVID, golf rounds played have been supported by many employees who continue to “work from home”.
As a result, the golf industry – which had seen persistent declines in rounds played for two decades – suddenly received a short-term boost that pushed growth in rounds played to the mid-single-digit positive percentages in recent years.
I do not believe this is sustainable.
The push to “return-to-office” is gathering momentum. The federal government under President Trump is requiring employees to be back in the office. Private companies such as Amazon, AT&T, and JPMorgan Chase are doing the same. Companies are also adjusting the balance of hybrid work to lean more towards in-office – where in the past employees might come into the office two days per week, requirements are moving towards three or four days in the office. Collectively, this poses a meaningful headwind to golf rounds played.
Golf is seeing competition from other outdoor sports. In particular, pickleball is now the fastest growing sport in the US and is seen as more inclusive across age and gender. For those looking for an outdoor sport to play, pickleball is increasingly competitive with golf. Professional golf is experiencing a period of uncertainty and challenge. The recent schism between the PGA Tour and LIV Golf has created controversy amongst professional golfers and across golf’s fan base. Professional golf also does not currently have a transcendent star, like Tiger Woods in the 1990’s and 2000’s, who can appeal to a broader range of society. Structural headwinds to golf remain. Golf is a difficult sport to master, an expensive sport to play, and imposes a significant time burden (4-5 hours to play 18 holes). None of these structural challenges have changed, which all reduce golf’s appeal to the general population. Growth in golf rounds played fell to just +2.6% in 2024 (YTD through November 2024). I think this figure is going lower. Google Trends data for “golf courses near me” show a clear declining trend, and are at the lowest level since COVID began.
Fewer rounds played will directly pressure Acushnet’s sales of golf balls and apparel (such as golf gloves), and indirectly pressure margins and equipment sales, creating a material headwind to Acushnet’s business.
Risks
My thesis, in some ways, is a “leap of faith”. I am predicting Acushnet’s EBIT margins will fall and that golf rounds played will flatline or decline. Neither have happened yet, although leading indicators are strong that this is likely just a matter of time. That said, I could be wrong.
Another risk to the thesis is increased participation of women. It’s clear from the data that more women are playing golf than pre-COVID, and the trends remain reasonably strong that women’s interest in the sport of golf have remained underpinned. If golf becomes a sport that appeals to women in a way it has not in the past, my thesis could also prove wrong.
Finally, my price target relies in part on multiple contraction back to historic levels. Markets may have a different opinion of the right multiple for GOLF, which could impair my thesis.
Conclusion
Acushnet’s EBIT in 2019 was $186M. In 2024, Acushnet’s EBIT should approach (but not quite reach) $300M.
At the same time, Acushnet’s valuation multiple has expanded from 9-10x EBITDA to 13x EBITDA.
I believe both are unsustainable. I think Acushnet’s EBIT margins have significant downside risk, especially in equipment. I also think golf rounds played should continue to mean-revert back to historical no-growth or negative growth levels.
Should these come to pass, I suspect Acushnet’s valuation multiple will be pressured too.
Assuming EBIT of $250M in a couple years, and a 10x EBITDA multiple, I see a share price a third lower than today in the range of $45/share. This represents significant downside to fair value from a current stock price closer to $70/share.
Catalyst EBIT margins mean-revert lower for equipment and golf balls Golf rounds played mean-revert to historical trend of zero or negative growth EBITDA valuation multiple contracts from 13x to 10x