The following is a guest post by JT McGee of MoneyMamba:
Image by chispita_666 via Flickr
Adam’s Golf (ADGF) is the micro-cap of all micro capitalization stocks—you could buy the company outright for just over $42 million dollars. But while its small size may be threatening to some, it is important to remember that sometimes the biggest earners come in the smallest of stocks. This stock, I believe, is one such stock.
I’ll dive into the macro and the micro scene to see what makes this company so attractive.
Adams Golf Financials
Even with a market cap of $42 million, the company retains over $6 million in cash, $17 million in receivables, and $27 million in inventory on hand. (Inventory piles up in the 4Q before slurry of sales in the first and second quarters.)
The company has only $15 million in short-term debt, and zero long-term debt. Ignoring its $10 million in long-term assets because they’re mostly illiquid, the company is still well capitalized, with current assets outpacing debt by $27 million, according to the 2010 annual report.
The Macro Scene: A Depressed Economy
You’d have to have lived under a rock to avoid the headlines. Consumer spending is weak, and recovery may be months, if not years away. For a spendy sport like golf, a poor economic climate isn’t exactly bullish, except when it is.
While sales for golf clubs and accessories were weak in the deepest of the downturn, this also means there is plenty of pent-up demand. Golfers, after all, are still doing quite well.
A series of surveys conducted by OnCartWest revealed that the average golfer takes home over $87,000 per year and has a net worth of more than three-quarters of a million dollars. The average golfer, aged 39 in 2003, isn’t pinching pennies. In fact, more than a quarter of all golfers own their own business. (Study information link: http://www.oncartwest.com/pdfs/demographics.pdf)
The benefit here is that golfers have a lot of their net worth tied into their own investments, and are disproportionately made beneficiaries of rising stock prices. Appropriately priced in the middle of the road for golf clubs, Adams is a perfect fit for the penny pinchers, as well.
The Micro Scene: Adams Acquisitions and International Growth
One of the most exciting elements of Adam’s Golf is that it’s growing, and quickly. In January, the company deployed $1.65 million in cash to purchase a then defunct Yes! Golf, a company best known for its line of putters. Adams has plans to revive the brand, using its image and other intellectual property (designs, patents, and distribution channels!) purchased at auction to buffer its brand. Yes! Golf sports a collection of victories in golfing tournaments, with its putters playing a part in more than 100 tournament victories, including several wins in the majors.
Even rosier is that Yes Golf has excellent international sales. The company has a very serious grasp on English and Irish golf retailing, a weak spot for Adams. When Adams revives the Yes! brand internationally later this year, it stands only to reason that Adams’ line of drivers and irons will soon follow Yes! putters across the pond. International sales posted 8% growth last year, despite frequent backorders on one of its most popular products: its line of Speedline drivers. That’s attractive, especially since many of its backordered products were still backordered by June.
With $7 million more in inventory this year than at the same time last year, the annual report notes that the company made sure they wouldn’t face a lack of supply to meet 2011 demand.
Domestically, Adams stands to benefit in grabbing more shelf space. With two brands under its wings, the company will soon have an entry into the putter section of your nearest golf store. Golfers have commented that it was Adams putters that had been the weakest link in their collection.
Qualitative Factors Behind Adams
Where other golf giants like Callaway cut back on their marketing in 2009-2010, Adams doubled down. The company sponsored several new players, and expanded its marketing to boost international sales.
This aggressiveness paid off in a big way when Golf Digest named as “Editor’s Choice” on its annual “Hot List” for 2010, a mark of a brand that is growing in recognition. Its Idea hybrid-irons again took home the loot as the best hybrid clubs in golf, but its drivers also took silver awards for being top-notch clubs.
Its hybrid clubs have always been its best seller, but where Adams is winning awards for its products in 2011, it was pitching them on televised infomercials less than a decade ago. This is a brand that is still working to brand itself as a quality club amid larger, well established rivals. A staple on the Seniors tour, the young guns in the PGA are just starting to take to the hybrid, “game improvement” irons, a segment this company practically owns.
In terms of sponsorships, one particular golfer caught my eye: Ryan Moore. An improving player on the PGA Tour, Moore forfeited an ownership stake in Scratch Golf to become an Adams-sponsored player. Ranked 42nd in the world, he’s not exactly a household name, but he is known on the tour among enthusiastic golf fans.
One of the best parts about the internet is how you can see, in real-time, how people view a particular product. A quick Google search of “forum” “Adams Golf” reflects a number of good reviews, with the customers seemingly becoming happier with their products the closer you get to present day. This is very important to me, as I know that people who take the time to talk about golf online are probably more interested and informed on golf products than your average Joe.
Not for the faint of heart
Adams Golf is a thinly-traded micro-cap, and as a result the stock sure moves fast when it does. With daily volume of just over 15,000 shares per day, investors would be wise to average in slowly, rather than make aggressive purchases.
That said, a lack of liquidity shouldn’t be too daunting for anyone in for the long-haul. As someone who was happy to snap up shares when you could buy the company for just over its cash on hand this time last year, I’m still happy to be buying in at these lowly valuations. If you’re in it for the business, the market doesn’t much matter, as far as I see it.
When the dust settles and the economy recovers, it will become clear that the management is more than capable to take this small company to the next level. Aggressiveness in growth, especially in a horrible market cycle shows that the management has the capacity to see this thing through. I’m in this company for a potential buyout play; it’s exceptionally cheap, and a classic value stock but with all the avenues for future growth.
In going forward, investors have a rare opportunity to get into a company that is doing everything right in an industry that the economy has wronged. As pure-play on consumer spending, Adam’s looks like an attractive wager in 2011.
Would I make it 10% of my portfolio? Absolutely not! With less than 600 shareholders, ownership is so concentrated that to buy in big you might push this little stock up 20% in a day. But with that said, this is where individual investors have the upper hand on institutional investors—stocks where it doesn’t make sense for the big-boys to come in heavy.
If you’re looking for a Walmart or a Proctor and Gamble, this stock simply isn’t it. But if you like risk, reward, and enjoy playing the fast-paced world of largely undiversified micro caps, this one ensures you’ll have the ride of your life. A 100%-pure golf stock, there’s no diversification here, and to be honest, it’s a mostly all or nothing wager. It’s not intended for your retirement account, though it does make an exciting bet on recovery.
Full Disclosure: I am currently long Adam Golf as a long-term play. As mentioned earlier, this is a high-risk, high-reward stock that is not suitable for those who are not used to investing in small cap stocks, and I would caution everyone to do their own due diligence before making their own informed decision about how they should manage their money.
The above was a guest post by JT McGee. JT blogs about finance, economics, business and more at MoneyMamba.com.
Great article! While I wouldn’t invest in this or any other stock I enjoyed reading about it. Had I a bit less resolve I would have signed up for the chepeast brokerage and place a buy order.
-Ravi Gupta
Nice article JT. The way I think about it, golf clubs could be thought of as luxury goods. People aren’t going to walk into the pro shop and buy $1500 irons in economically difficult times. If your going to invest in Adams(ADGF), why not invest in Callaway(ELY). Callaway is selling for just $1 more and its a more trusted name. Nevertheless I’d be long on both of these companies.
Interesting perspective. Micros are a bit risky for my blood. I prefer to hold MF or ETFs over the long haul and build wealth at a more metered pace. With that said you almost had me convinced to make the trade. Good read!
Good analysis. I may look into it.
@ Ravi – Staying consistent is the key to making things happen. Investing in individual companies isn’t for everyone, especially micro-cap companies. High-five on the cheap brokerage account, though. Best way to make money is to stop wasting it. 😀
@ Jeff – ELY is definitely an institution in the golf market, but it won’t hit the growth/earnings targets I’m seeking, and it’s a money loser this year and last. It may be only $1 more per share, but it’s 10 times larger in total market cap, which is way more important. As a final touch on ELY, I don’t like to see companies cut back on advertising during hard times, especially if it’s a high-margin business like golf. Advertising sustains margins, and cutting back on advertising during recession (most golf companies excluding ADGF cut back) is a sure-fire way to kill future margins.
@ Joe – Thanks! Almost convinced you? Pfft, do you I have to pay you to buy it? 😛 I’m just kidding…different strokes for different folks. 🙂
Very interesting read. But I am like Joe. Micros are a little too risky for my taste. So far I have mostly stuck with index funds and ETFs. The individual stocks we have are mostly large cap bought for DRIPing.
As a person who has played golf for about 20 years now (out of my 26 years on this earth), Adams is a company that really is not even on my radar screen when it comes to purchasing equipment. Not really sure why, to be honest.
I’m not really loyal to one certain brand, but many of the major companies are known for one certain product that really sets them apart.
Callaway – drivers
Titleist – drivers and golf balls (Pro V1) & wedges
Mizuno – (pro style blade irons)
Ping – (drivers and irons and putters)
Nike – (drivers and irons)
Adams – ??? never used any of their products
I didn’t even know that Ryan Moore was sponsored by Adams, but it is good that they have a younger player on their brand now. Tom Watson is probably their most well known equipment user and endorser, although he is getting pretty old now and a lot of younger people don’t even who he is.
Now – as far as growth companies in the golf industry go, this may very well be a good candidate. A lot of the other companies are very mature, so Adams being so small should have a chance to grow if they can become very well known for one really good product.
600 shareholders?! Wow, sometimes I forget just how small these micro cap stocks really are when compared to the giants out there.
Very good write up! Besides the size of the company and the unpredictable nature of our current economy, is there anything else a prospective investor should watch out for?
Nice post JT. Honestly, the picture of the golf club is what sucked me in. Lucky for you, I’m also a sucker for stocks, so naturally I read the entire article. This stock is incredibly interesting. It’s one of those that I might throw $1,000 and forget about for a while – like you said, invest for the long term.
Great insight! I look forward to reading your posts at your regular blog now. 🙂
Wonderful assessment of Adam’s Golf. Although I have never actually used one of their clubs, I would certainly consider getting a hybrid if I did. Most of my friends have a hybrid club and many own the Adam’s Tight Lies.
Too bad I don’t have $42 million lying around. I would buy the company myself. It sounds like they are doing everything right. Ryan Moore should become increasingly visible over the next few years as well.
TCI – Thanks! Good luck 🙂
Suba – I can defintely understand the love of DRIPs for long-term wealth building. As a general rule, I tend to avoid companies that pay a dividend (not always) because no dividend means that fewer mutual funds can own them. That means fewer big boys in my little stocks. 😛
Bogey – Thanks a ton for your input; I knew it’d be a good idea to drop you a line. I’m in it for growth…though I do like the margin of safety in the debt:assets ratio, especially their cash on hand.
Khaleef – The founder of the company is still on the board. Obvious his insight is worth something, but I can’t help but think back to Yahoo’s decision not to sell out to MSFT at $28 per share, then $31 all because Jerry Yang just couldn’t sell his beloved Yahoo. I don’t think that’s all that much risk here, but founders are scary, especially if they’re emotionally invested in the business. All things considered, not that big of a deal…unless it becomes one. 😛
Additionally, as with any company around $5.00, it’s sure to see a lot of required mutual fund action. Mutual funds can’t buy shares at under $5.00, so it is usually the case that the moves through the $5 line–up and down–can be pretty swift. Again, only a big deal if you’re thinking short-term. If you want liquidity, this stock is not it!
LAMF – Thanks! That’s the way I see it–it’s not a significant portion of my portfolio, but it doesn’t necessarily need to be as it is far more levered to the economy than my average position.
OptionsDude – If I had access to the cash, I’d buy it for $42 million. The way I see it is that Yes Golf! gives Adam’s twice as much shelf space already, so if you’re…say, Ping, for example, it might make sense to start thinking about how you could best deploy cash so that this little once “as seen on TV” independent doesn’t start taking over your space. All things considered, golf is a small market, but there’s still tons of money in it if the economy recovers.
Very interesting post. It is funny because the last thing I would have considered buying at the start of an economic downtown is anything leisure related like golf. However, now that we seem to be recovering, it might be an interesting play, although getting in awhile ago would have been better. However, that is Monday Morning Quarterback talk, because things seemed so dire when things were at their worst that recovery seemed so far away.
I am going to keep this on my watchlist. Thanks for the info.
Cool article.
I love golf, but I would not invest in any golf company that didn’t pay a dividend.
I don’t want to mix buisness with pleasure 🙂
Thanks for sharing a great guest post and well thought out analysis with my readers, JT!
I really a nice tour with your website and this one’s really interest me a lot.