SBJ/June 15 - 21, 1998/No Topic Name

Golf's booming market doesn't extend to equities

Golf seemingly could not be healthier, what with the emergence of Tiger Woods and the explosion in interest among recreational players. So why are some golf stocks hitting 52-week lows and others rapidly declining?

In a word: Callaway. The top producer of golf clubs has suffered a nearly $1 billion loss in market value in the last few months, hitting a 52-week low just last week. The Asian financial crisis and a domestic pricing war have eaten away at the company's once-vibrant earnings. And as the standard bearer among public golf companies, it has dragged these firms' shares down as well.

Golden Bear Golf, Jack Nicklaus' ailing company, hit a 52-week low recently. Also declining were shares of CoastCast, which manufactures stainless steel golf clubheads for companies like Callaway; Family Golf Centers, the largest golf-range operator in the United States; Aldila Inc., the top U.S. manufacturer of graphite shafts; and TearDrop Golf Co., which makes a wide range of premium-priced golf clubs.

Further, the United States Golf Association cast a pall over the entire industry with the disclosure last month that it was mulling a ban on some equipment, including certain titanium-faced drivers. A ban on these drivers would drastically affect Callaway, whose Big Bertha clubs are among the most popular in the United States.

"Most of Callaway's problems are due to the earnings, but I think the uncertainty the USGA's potential pronouncements bring about are certainly hurting the stock," said Robert Marvin, a securities analyst with The Seidler Companies in Los Angeles.

Callaway announced last month that its fiscal second-quarter earnings would be less than half of what analysts were expecting. Soon after, the company announced it would cut prices on some of its premium drivers. The company rarely focused on price, so the move to recapture lost market share through lower price tags caught many investors by surprise, said Deryck Lampe, a portfolio manager with Conseco Capital Management in Carmel, Ind.

"That is being viewed as a major departure from the way they were doing business," he explained.

While Lampe said he is impressed with the company's management, his fund now holds no shares of its stock. The price cuts come at particularly bad time, Lampe added, because Callaway is spending heavily on research and development. He dismissed the USGA rumblings, refusing to believe the organization would try to limit technology.

"I don't think you can invent the car, invent highways, let people drive all day and then say we are going back to horses," he argued.

The USGA, the national governing body for U.S. golf, is studying whether certain clubs have a spring-like effect, which would violate the rules of golf. A ruling could come at this month's U.S. Open.

Callaway and Titleist, a private golf company, have responded with a publicity campaign against the USGA. Callaway also retained as special counsel Leonard Decof, an attorney who represented Ping, a unit of Karsten Manufacturing, in its lawsuit against the USGA when the body sought an equipment ban in the 1980s.

The darkened mood caused by the USGA and Callaway's earnings woes have depressed shares of other golf stocks. Golden Bear lost 31 percent of its market value in the last month, though its disclosure in early May of accounting irregularities at a construction unit hastened the stock's freefall.

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Related Topics:

Ping, Titleist

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