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Home PERCEPTION VERSUS REALITY:

Its been said perception is reality. Maybe, maybe not. On Wall Street where buy on the rumor, sell on the news is a tried and trusted strategy, perception is an important element. Financial markets have been known to be manipulated, more than once, for a buck or two.

On Friday, Acushnet began trading on the New York Stock Exchange. It represents a historic moment for the company as well as a necessary one. In some ways it’s a back to the future moment as well. It was once owned by Fortune Brands (FO: NYSE) and therefore public life is not foreign to it. However, the golf business was somewhat sheltered under the shadow of a large entity.

Fortune Brands sold Acushnet in 2011 to South Korea's Fila and some private equity investors for $1.23 billion. Fast forward to 2016 and based on the $17 initial public offering price, the company’s market capitalization was placed at $1.3 billion. It implies the company’s value hasn’t changed since 2011. Keep in mind the concept of perception versus reality.

The IPO pricing was more a function of market conditions and public perception of the golf business. Only 94 IPOs have been priced in the U.S. so far this year, down 46 percent from the last year, according to Renaissance Capital, which manages an IPO-based Exchange Traded Fund. When Acushnet was sold in 2011 it started the clock ticking. The investment group’s strategy was to hold on to the assets for five years and then look to sell it off. However, only a portion of the group decided to sell. In order to facilitate the transaction the New York Stock Exchange was enlisted. In many instances an IPO is used to generate funds back to a company that has a purpose for it. In the early 90’s Callaway Golf (ELY: NYSE) went to Wall Street to help fund its growth, for example. It also spawned a wave of other golf companies to join it, as golf was considered somewhat of a hot commodity, believe it or not. It’s a much different world today than it was back then (perception vs reality). Acushnet didn’t receive any of the funds from its 2016 IPO.

While Tiger Woods was taking the PGA TOUR by storm in the 90’s, he helped to make golf cool and in turn generated higher television ratings. He still does today, except he hasn’t played in more than a year! In the 90’s the notion was populated that golf needed a new course to open every day in order to satisfy demand. adidas bought Solomon, which owned TaylorMade at the time and Nike Golf came to the party with its big reputation. No one ever anticipated a financial crisis in 2008/2009 that would nearly cripple the United States.

While the general U.S. economy has taken its time to find it’s footing, the golf industry has gone through some of its own corrections. An over supply of courses implied an unlimited upside for golf yet the opposite has been the case. Dicks Sporting Goods doubled down when it acquired Golf Galaxy and PGA TOUR Superstores arrived on the scene and began its own expansion phase. It was only a couple of years ago that retailer Edwin Watts went into bankruptcy protection. This year it’s been Golfsmith. Dicks Sporting Goods appears to have successfully outbid the competition for Golfsmith and so history repeats itself yet again. In hindsight the industry was clearly overbuilt, yet few have recognized it.

Guilt by association has become a recurring theme in describing the golf industry. Acushnet has been caught in this dilemma only to the extent of its public offering. TaylorMade has been for sale for an extended period of time and on the surface, it appears there are no takers. That is likely a function of price, which is something Acushnet found it in its IPO. With any offering, price is a case of simple economics: demand versus supply. It’s determined between the investment bankers and investors when it comes to Wall Street.

acushnetnyseMost transactions often take on a life of their own. Initial price talks for Acushnet were set between $21 and $24/share. It ultimately came in at $17, yet finished the first day of trading at $17.95. It implies the deal was fairly priced and demand helped to propel it higher on its first day of availability. Life on Wall Street is a marathon and rarely if ever is there a finish line. No one remembers the IPO price set for Callaway Golf or any other company for that matter. What happens from here is what really counts.

In order to survive, if not excel in the world of bulls and bears it comes down to sustainable financial performance. Short terms price fluctuations are typically a matter of perception. For businesses that can deliver growth and exceed analyst expectations (perception again) the rewards represent a higher valuation due to soaring stock prices.

In the instance of Acushnet it will be compared and contrasted to its nearest rival, Callaway Golf, which will report its third quarter operating results this Thursday. Some analysts have already recognized that Acushnet’s valuation is more attractive than Callaway’s, which has seen its stock price improve since the start of 2016 thanks to its financial interest in Topgolf. Many are also aware that Acushnet enjoys a healthier bottom line. Many also associate Acushnet with its Titleist brand and specifically its ProV1 golf ball franchise. Less attention is paid to FootJoy, Pinnacle, Vokey and Scotty Cameron brands.

While its golf ball business is the envy of its competition, the company believes its future opportunities are still plentiful. “Its a difficult landscape and is it what it is,” noted Wall Uilhein, Acushnet’s CEO. “The game has been losing players and those that have been dropping out are in the 1-7 rounds a year category. That isn’t Acushnet’s sweet spot,” he continued. So under the heading of perception is reality, how many believe the casual player is teeing up a ProV1 each time? Uilhein remains confident in his company’s ability to achieve growth and it will come from the remaining baby boomers and Gen X crowd. The serious player, estimated to be 7.5 million worldwide, remains committed, if not hopelessly addicted to the game and if nothing else this has been proven over the past eight years. The dedicated/serious players continue to play as well as spend, which is often an overlooked fact. The under 30 crowd (millennials) is a focal point for many industries. Golf is still waiting to see what it will bring to its party. Yet for Acushnet, it’s never really been its focus.
 
"Our sticky target audience is the dedicated, serious golfer," Uihlein said. "Go back to the origins of the company, that was our primary target audience. We think that's the high-quality consumer in the space. And for us, as a result, we're really focused on that golfer and that's why we're positive about the future.

“People know we have great golf balls but they have been slow to recognize we have great wedges, for example. We are in an enviable position in that we are a multiple brand leader and we are looking to build ourselves out by categories. We have a proven, yet different model that is targeted to dedicated golfers who have proven to be resilient. We are in a good position.”

Uilhein is considered one of, if not the, smartest in the golf industry. He has successfully navigated Acushnet through good times and bad since 1995. His record speaks for itself. In terms of the future, he remains optimistic for the sake of his company’s prospects. Uilhein sees a 5-7 year window remaining for Baby boomers that enjoy the game and 10-25 years for Gen-Xers. His task will be educating and convincing Wall Street. It’s a marathon, not a sprint. Just keep in mind perception versus reality can often mask what really is happening. Where the rubber meets the road is often determined by the bottom line.