Tuesday, February 14, 2012

Adams Golf-Part Two

This is Part Two of my update on Adams Golf (ADGF), which is one of my largest holdings.  The company continues to perform solidly in an uncertain environment.  Its has been managed conservatively, and they are certainly poised for growth.  The rest really depends on the golf business and the economy as a whole.

Three points I want to touch on in this post:

1)The company's cash position and possible uses.

2)Shareholder's impatience and the hiring of Morgan Stanley to analyze the business.

3)The golf club market and the future of the sport as it relates to ADGF.

1) Adams has a great cash position for a company of its size.  It grew even further with December's announcement of a settlement with Zurich American Insurance Company, following a lawsuit based on issues involved with the company's IPO.  Long story short, Adams received a juicy $6.4 million payout in January.  No specific plans have been made as of yet for the funds.  This now puts the company's cash position somewhere between $17-18 million, with no debt.  So the company is sitting in a very nice position, and is ready to ride out any more problems we may see.

2) Starting last fall, some of the largest shareholders have begun to share their impatience with the management of Adams.  The stock has been considered "cheap" for years now and the share price just hasn't moved enough relative to the value of the business.  They have begun to put some pressure on management to do something to unlock some value for shareholders.  This can mean a number of things, but traditionally it means either A) a dividend to shareholders (either one time, or quarterly) B) a share buyback, or C) an acquisition of another company.  In January, Adams announced that it had hired Morgan Stanley to explore "strategic alternatives to enhance shareholder value."  Rumor has it that they are also valuing the company and searching for potential buyers as well.

The stock saw a jump after this announcement, and many shareholders appear to be thinking a deal may be imminent. In my opinion, a sale of the company isn't necessarily the best option here.  I personally think they'd be selling at a time when you're not going to get optimum value for the company.  I'd hate to see a sale just for the sake of "doing something" to placate shareholders.  I'd much rather see a dividend and/or share buyback in this case.

3)Adams has a great range of new products out (in fact, they lead the way in golf club technology in many areas).  They are #1 on tour in the growing hybrid club market.  They have led the way with their "velocity slot technology" in hybrids and fairway woods, which other, larger companies have also started to emulate. They made a great acquisition last year of YES Putters (at a very cheap price), and have just re-launched the brand.

They have a solid group of professionals representing the brand name on tour.  Yani Tseng is the #1 women's golfer in the world.  They have Aaron Baddeley and Ryan Moore, which are two rising stars on the PGA Tour.  They just signed Robert Karlsson, a solid player which will give them a nice presence on the European Tour.  They also have a great group of Champions Tour players, including Tom Watson, Kenny Perry, and Bernhard Langher.  I'd love to see Adams use some of that cash to go after a "star player" on tour.  Whether they admit it or not, golf companies make a lot of money when a player wins a big tournament, and tons of average golfer run out and buy the same clubs, whether they are right for them or not.  This has worked well for companies like Taylor Made and Callaway.

The golf industry is just starting to make a comeback, in my opinion.  There were way too many courses built in the last 15 years, and many are struggling.  Golf is a sport that relies heavily on discretionary spending by consumers.  If times are tight, people make choices to cut out things like golf.  But the economy is improving.  Golf has become cheaper to play as courses are lowering rates to encourage people to come out (at least in my experiences).  Tiger Woods is back in contention in tournaments, which drives massive TV ratings.  This always spills back into positives for the industry.  I think 2012 will be a solid growth year for the game.

In conclusion, I'm holding my shares.  If they decide to sell the company, it will probably be for a higher price than it sits currently.  If they announce they are not selling the company, we'll likely see a drop in shares.  This is mostly because some people have bought in recently hoping to jump in on a possible buyout. In the end, the company is still undervalued though.  They are also in a great position for organic growth in the coming years.  The economy and golf industry will be back, and they have the pieces in place to benefit.

If you find this post, I thank you for reading.  If you want to chat about this stock or situation, feel free to comment to this post, or shoot me an email!

No comments: