Callaway Golf Company (NYSE:ELY) and Vista Outdoor Inc. (NYSE:VSTO) are the two most active stocks in the Sporting Goods industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect ELY to grow earnings at a 30.90% annual rate over the next 5 years. Comparatively, VSTO is expected to grow at a 25.00% annual rate. All else equal, ELY’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. Callaway Golf Company (ELY) has an EBITDA margin of 9.11%, compared to an EBITDA margin of 3.82% for Vista Outdoor Inc. (VSTO). This suggests that ELY underlying business is more profitable. ELY’s ROI is 28.90% while VSTO has a ROI of -9.80%. The interpretation is that ELY’s business generates a higher return on investment than VSTO’s.
If there’s one thing investors care more about than earnings, it’s cash flow. ELY’s free cash flow (“FCF”) per share for the trailing twelve months was +0.86. Comparatively, VSTO’s free cash flow per share was +0.39. On a percent-of-sales basis, ELY’s free cash flow was 0.01% while VSTO converted 0.87% of its revenues into cash flow. This means that, for a given level of sales, VSTO is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. ELY has a current ratio of 2.60 compared to 3.40 for VSTO. This means that VSTO can more easily cover its most immediate liabilities over the next twelve months. ELY’s debt-to-equity ratio is 0.01 versus a D/E of 0.87 for VSTO. VSTO is therefore the more solvent of the two companies, and has lower financial risk.
ELY trades at a forward P/E of 26.12, a P/B of 1.88, and a P/S of 1.28, compared to a forward P/E of 14.39, a P/B of 1.08, and a P/S of 0.55 for VSTO. ELY is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. ELY is currently priced at a -15.02% to its one-year price target of $15.31. Comparatively, VSTO is -1.36% relative to its price target of $24.33. This suggests that ELY is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.10 for ELY and 2.50 for VSTO, which implies that analysts are more bullish on the outlook for VSTO.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. ELY has a beta of 1.19.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. ELY has a short ratio of 1.82 compared to a short interest of 7.12 for VSTO. This implies that the market is currently less bearish on the outlook for ELY.
Callaway Golf Company (NYSE:ELY) beats Vista Outdoor Inc. (NYSE:VSTO) on a total of 8 of the 13 factors compared between the two stocks. ELY is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share and has lower financial risk. ELY is more undervalued relative to its price target. Finally, ELY has better sentiment signals based on short interest.