High Expenses to Affect Callaway Golf's (ELY) Q3 Earnings

Zacks Equity Research

Callaway Golf Company ELY is slated to report third-quarter 2018 results on Oct 24, after the market closes.

Over the past few quarters, the company has been benefiting from the flourishing golf industry. In the United States, demand for golf equipment has been consistently up, which has helped the company to witness increased net sales in the second quarter. The trend is also likely to have continued in the third quarter, given Callaway Golf’s regular product innovations.

Driven by strong demand and product lineup, shares of Callaway Golf have gained 60.5% over the past year, outperforming the industry’s rally of 5.5%.

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Meanwhile, high costs of operations and expenses related to acquisitions have been hurting the company’s margins and are expected to affect third-quarter earnings.

Let us look deeper into factors that are likely to have shaped Callaway Golf’s top and bottom line in the third quarter.

Top Line to Gain From Strong Demand

In the second quarter of 2018, Callaway Golf’s net sales increased 30% year over year, driven by robust growth in iron category and golf ball business. Further, the TravisMathew business, acquired in August 2017, added to top-line improvement.

We believe that the upside trend is likely to have continued in the third quarter as well. The Zacks Consensus Estimate for net sales in golf balls and golf clubs are pegged at $40.9 and $134. Overall, the consensus estimate predicts net sales of around $250.8 million in the third quarter, reflecting 3% year-over-year growth.

High Costs to Mar Earnings

The consensus estimate pegs third-quarter earnings for Callaway Golf at a penny, suggesting an 80% decrease from the year-ago quarter. We believe that while top-line growth is in the cards for the company, the bottom line might have been significantly affected by higher expenses related to the TravisMathew business, variable expenses related to higher net sales and the negative impact of foreign exchange.

Zacks Model Suggests a Beat

According to our quantitative model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP has a fair chance of beating estimates. Meanwhile, stocks with a Zacks Rank #4 (Sell) or 5 (Strong Sell) are best avoided.

Callaway Golf has an Earnings ESP of +71.42% and a Zacks Rank #1, a combination that highly increases odds of an earnings beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Callaway Golf Company Price and EPS Surprise


Callaway Golf Company Price and EPS Surprise | Callaway Golf Company Quote

Other Stocks to Consider

Here are some other companies from the same industry that are poised for an earnings beat this quarter.

Acushnet Holdings GOLF has an Earnings ESP of +28.57% and a Zacks Rank #3. The company is slated to report its quarterly results on Nov 1.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Malibu Boats MBUU has an Earnings ESP of +3.64% and a Zacks Rank #1. The company is expected to report quarterly numbers on Nov 6.

MCBC Holdings MCFT is scheduled to report quarterly results on Nov 8. The company flaunts a Zacks Rank #1 and has an Earnings ESP of +0.49%.

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