BofA Securities has adjusted its outlook on Topgolf Callaway Brands (NYSE: MODG), raising the price target to $14 from $13 while maintaining a Neutral rating.
The revision follows the announcement by Topgolf Callaway Brands on Wednesday of its intention to separate into two independent, publicly traded companies by the second half of 2025.
The proposed plan includes a spinoff of at least 80.1% of TopGolf, which is structured to qualify for tax-free treatment under U.S. federal income tax regulations.
As part of the separation, Callaway will retain all of Topgolf's debt, which is estimated to be leveraged at approximately 4.0 times at the time of the spin.
The restructuring will result in Callaway encompassing the Golf equipment, Toptracer, and Active Lifestyle segments, while Topgolf will include the current Topgolf business operations.
Topgolf is expected to maintain its venue financing obligations, but it will not carry any debt and is estimated to have a $200 million cash balance post-separation.
Moreover, the company anticipates $25 million in dis-synergies, primarily affecting Topgolf. Topgolf Callaway Brands also aims to reduce the leverage to 3.0 times for its Golf Equipment and Active Lifestyle business within one year following the transaction.
In other recent news, Topgolf Callaway has planned to split into two separate public entities: Callaway, a golf equipment and active lifestyle company, and Topgolf, a venue-based golf entertainment enterprise.
The separation, expected to be completed in the second half of 2025, will allow both entities to operate with greater strategic focus. Callaway has generated approximately $2.5 billion in revenue over the last twelve months, while Topgolf has brought in about $1.8 billion.
In a related development, Topgolf Callaway has entered into a multiyear strategic partnership with Visa (NYSE:V). This collaboration aims to enhance the digital experience for customers, offering benefits for Cash App cardholders and early reservation access at Topgolf venues.
Amid these developments, several analysts have adjusted their outlook on the company. Jefferies downgraded the stock from Buy to Hold and reduced the price target to $12.00, citing concerns about the company's post-merger performance.
KeyBanc also adjusted the stock rating from Overweight to Sector Weight due to the ongoing softening of sales trends and the uncertainty surrounding the outcomes of the strategic review. However, TD Cowen and Goldman Sachs revised their price targets for the company upwards to $13 and $15 respectively, reflecting a cautiously optimistic view of the company's future prospects.
InvestingPro Insights
As Topgolf Callaway Brands (NYSE: MODG) navigates through its restructuring plans, real-time data from InvestingPro shows a nuanced picture of the company's financial health and market perception. With a market capitalization of $1.98 billion, the company's valuation reflects a high P/E ratio of 92.78. However, when adjusted for the last twelve months as of Q2 2024, the P/E ratio stands at a more moderate 47.25, suggesting that the company's earnings potential may be viewed more favorably over a longer term.
InvestingPro Tips highlight that MODG is trading at a high earnings multiple, which aligns with the P/E ratio data. Additionally, analysts have revised their earnings downwards for the upcoming period, and net income is expected to drop this year. This could be of particular interest to investors considering the company's plans to separate into two entities. On a positive note, MODG's liquid assets exceed its short-term obligations, indicating a degree of financial stability.
Investors should note that the stock has experienced significant price volatility, with a 23.03% decrease in the past month alone, and a 31.16% drop over the last three months. Despite this, analysts predict the company will be profitable this year, which may offer some reassurance amidst the restructuring process. Additionally, for those seeking more comprehensive analysis, InvestingPro offers numerous additional tips to help investors make informed decisions regarding MODG's stock.
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