Callaway Earns a Double Bogey but Hertz Might Pick Up Speed
Stock Exchange lets readers listen in as Times staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.
Callaway Golf (ELY)
Mike: Say, Jim, did you know that the world is divided into eight categories?
Jim: Go ahead.
Mike: There are core golfers, avid golfers, moderate golfers, occasional golfers, beginning golfers, junior golfers, senior golfers and then, I imagine, non-golfers. And Callaway Golf serves the first seven--a group that, unfortunately, is barely growing in size.
Jim: You forgot the ninth category--those who heave their clubs into the lake. I assume those categories came out of some research you got about Callaway, which is based in Carlsbad.
Mike: Yes.
Jim: And which category do you fall into?
Mike: Somewhere between the non-golfer and the occasional golfer. And you?
Jim: The category Mark Twain once defined by observing that golf is “a good walk spoiled.” Seriously, Callaway a few years ago revolutionized this sport by creating “oversized” golf clubs, especially the drivers.
Mike: Called the Big Berthas, which shifted the whole idea of “wood” drivers to metal ones that go “clink” when you hit them.
Jim: They were an instant sensation, even though the clubs can cost several hundred dollars apiece.
Mike: Golfers were willing to pay that price for a good while. But then demand started tapering off.
Jim: That wasn’t the only problem, and you can see it by charting Callaway’s stock price.
Mike: Yes. In fact, the Callaway stock chart reminds me of nothing so much as the third hole at Limuru, where I used to play when I lived in Kenya. You drive off the tee, and your ball promptly disappears over the top of a cliff. Then you clamber down to find it at the bottom.
Jim: Two years ago Callaway traded for about $30 a share, and then the company’s performance turned into a duck hook.
Mike: Which is why it trades for $14 and change today.
Jim: There were two main problems. Asia, which is a huge market for Callaway, went into a severe recession. Second, all of Callaway’s golf club rivals came out with their own oversized clubs, and suddenly the Big Bertha wasn’t the only game in town.
Mike: I think there’s another problem, Jim. Callaway ran out of superlatives.
Jim: Meaning?
Mike: That first you had Big Bertha. Then the Great Big Bertha. Then the Biggest Big Bertha. Where does it go from here? The Biggest Durn Bertha That You Can Imagine?
Jim: Which brings up another problem that helped derail this company. Last year the U.S. Golf Assn., which regulates golf equipment, started intimating that it might outlaw some of these oversized clubs. Not much has come of it yet, but it badly distracted Cal-laway and made a lot of investors nervous.
Mike: That’s not all. Look, basically the number of golfers in this country is static. The number grows less than 2% a year. Spending on golf is rising pretty smartly, but most of that cash is going to golf courses in green fees, not for new equipment.
Jim: I’m not surprised. I mean, how many times can you shell out $500 or $1,000 for the latest clubs from Callaway or anyone else?
Mike: So the point is, where is Callaway’s growth going to come from? It’s a question I can’t answer, and I’d avoid the stock.
Jim: Me, too, even though Cal-laway is trying to diversify by entering the market for golf balls next year. A swell idea, except there are only, oh, dozens of competitors in that market too.
Mike: Callaway, in fact, has had to explicitly reassure its investors that it does not expect the USGA to have a problem with its new golf ball, either.
Jim: Legal or not, that’s a risky move for Callaway. Many of its rivals in golf balls have long histories of success and avid fans, like Titleist, which is made by Fortune Brands Inc.
Mike: In the meantime, Callaway remains in turmoil.
Jim: It underwent a huge restructuring, slashing nearly a quarter of its work force. Callaway’s president abruptly quit and was briefly replaced by Callaway’s feisty octogenarian founder and chairman, Ely Callaway.
Mike: Hence the company’s ticker symbol.
Jim: Now he’s hired one Charles Yash from rival Taylor Made--which is owned by the German sneaker maker Adidas-Salomon--to be his new president and potentially his successor when he retires in a year or two.
Mike: Tell you the truth, I think Callaway is simply ripe to be taken over, perhaps by a large sporting-goods company. The question is, would that buyer be willing to pay much more than Callaway is currently worth?
Jim: Well, the Callaway and Big Bertha brand names still carry a lot of weight in the golf world. And in recent weeks, Callaway’s stock has been moving a tad higher, partly because the company posted third-quarter results that exceeded analysts’ forecasts.
Mike: But you still wouldn’t buy the stock?
Jim: Not on the speculation of takeover, no. In fact, I’d avoid this stock like the lake that runs down the left side of a fairway.
Mike: But the Titleist balls I had always seem to head right for that water. Maybe if Callaway comes up with a technology that will keep my drives straight... Jim: Sorry Mike, you won’t avoid getting wet using Callaway’s new balls, either.
Hertz (HRZ)
Jim: Next up is the world’s largest car-rental company, and it’s especially dominant at airports. It used to be wholly owned by Ford Motor Co.
Mike: And now it’s only mostly owned by Ford, which spun off about 20% of Hertz to the public in ’97.
Jim: First off we should note the big changes in the industry. In the past, all the major rental firms were owned by the car makers, which typically dumped their excess vehicles on the rental subsidiaries. That led to bloody price wars among the rental firms as they all tried to move those cars off the lot and grab market share.
Mike: And it led to huge losses.
Jim: Right. But in the past two years, most of the major rental firms--like Hertz--have gone all or partially into public hands. That means their managements have stockholders to answer to, and they’ve started caring about things like profits and stock prices. That’s gone a long way toward curbing those price wars.
Mike: You’re right. Not long ago I took my family on vacation and needed a rental car. I called Hertz and got its price, which I thought was exorbitant. So I tried what used to be the lower-price agencies, like Alamo and National. Well, guess what? Their prices aren’t much different from Hertz’s.
Jim: But as you know, Mike, life is not that simple. Yes, they all lifted prices for a while and that helped. But then this summer, some price-cutting occurred and Wall Street got very nervous that it was the old days all over again. So the rental stocks, including Hertz, have taken a beating.
Mike: Which is why I think these stocks, Hertz in particular, are buys right now.
Jim: I don’t.
Mike: No? You don’t want to be in the driver’s seat?
Jim: Give me another reason I should.
Mike: Pricing might stay soft for a while, but I think it’s going to firm up pretty soon. Demand for rental cars remains strong, especially with the economy doing so well. Americans are traveling more, both for business and pleasure. Plus, Hertz--despite being a full-priced operation--is still dominant and well-run.
Jim: Well, now it’s my turn to say I like the company but not the stock, which is customarily your mantra, Mike. Here you have Hertz running a smooth operation, and even taking the lead quite often in trying to push rental prices--and profits--higher. It’s also got one of the strongest records of consistent earnings growth. And its reward? Its stock has tumbled 32% since late June, to around $42.
Mike: Which makes it a great buy right now.
Jim: Wrong. This shows that even a well-managed leader in its industry has its stock beaten about because of fears that its industry is going to revert to the price wars of old. Why should I, as a Hertz investor, be penalized for that?
Mike: Come on, you know their business is going to grow. You know Alamo and National, greed hogs for market share that they are, are going to keep a bottom under rental rates. And Hertz has got the biggest piece of a growing market.
Jim: You could have said the same thing 12 months ago, and your Hertz stock is underwater. I will throw out one caveat, though.
Mike: I’m listening.
Jim: Speculation is rampant that eventually Ford will sell the rest of its Hertz ownership to the public. I’m not sure how that would affect the stock--it might help, by fully unlocking Hertz’s value, or it could hurt with all those shares diluting the market for the stock. But if Ford does that, Hertz is definitely worth another test drive.
Write or e-mail with a stock you would like to see discussed in this column. Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age.” Either can also be reached at Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.
You can hear a preview of Peltz and Hiltzik’s weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).
Callaway Golf
1999
Monday: $14.00
Hertz
1999
Monday: $42.44
