Topgolf Callaway Brands (MODG): A Contrarian Buy Amid Strategic Expansion

The stock of Topgolf Callaway Brands (MODG) has declined by 6.6% year-to-date, reflecting broader concerns about the Leisure & Recreation Products sector’s struggles. However, beneath the near-term headwinds lies a compelling growth story. MODG’s Q1 2025 earnings beat, strategic venue expansions, and diversified revenue streams position it as a contrarian buy for investors willing to look past short-term volatility. Let’s break down why this stock is primed to outperform.

Q1 Earnings: Resilience Amid a Challenging Sector

MODG delivered an earnings surprise of 375%, reporting a $0.11 EPS versus a projected loss of $0.04. While revenue dipped 4.5% to $1.09 billion, this outperformed internal expectations and underscored operational discipline. The Golf Equipment segment shone, with operating income surging 23.8% to $101.6 million, driven by margin improvements and cost controls. Even Topgolf, which faced a 6.9% revenue decline, narrowed losses to $11.9 million through aggressive cost-cutting.

The stock’s decline ignores these positives. While the Leisure & Recreation Products sector ranks in the bottom 36% of Zacks industries, MODG’s outperformance suggests it can weather macroeconomic headwinds better than peers.

New Venues: Fueling Growth in High-Potential Markets

MODG’s Topgolf segment is executing a strategic expansion, with new venues in Mississippi, Burlingame, CA, and Las Vegas set to open in 2025. These locations target high-income demographics and tourist hubs, leveraging Topgolf’s unique blend of entertainment and dining. Management has emphasized that each new venue generates $20–$30 million in annual revenue, with margins improving as venues mature.

The planned separation of Topgolf into a standalone entity—expected by early 2026—also signals confidence. This move could unlock value by focusing on core brands and reducing operational complexity, aligning with shareholder interests.

Diversified Portfolio: Golf Tech & Active Lifestyle Resilience

MODG’s diversified portfolio is a key defensive moat:
- Golf Equipment: Callaway’s dominance in innovation (e.g., AI-driven clubs) and rising global participation (especially in China and India) bodes well. Q1’s 23.8% operating margin expansion highlights cost discipline.
- Active Lifestyle: Despite downsizing Jack Wolfskin, operating income rose 23.9% to $30.6 million. Management’s focus on premium outdoor gear and cost controls is bearing fruit.

The company’s $805 million liquidity provides a cushion to navigate tariffs and inflation, while its “hold-to-buy” strategy prioritizes long-term brand equity over short-term swings.

Industry Challenges: A Sector Under Pressure, but MODG’s Edge

The Leisure & Recreation sector’s Zacks Industry Rank #157 reflects broader headwinds: inflation, weak consumer sentiment, and trade tariffs. However, MODG’s selective expansion and margin improvements distinguish it.

• Jack Wolfskin Sale: The planned divestiture will streamline operations, freeing capital for Topgolf and golf equipment initiatives.
• Tech Integration: Topgolf’s gaming platform (WGT) and digital services enhance customer engagement, reducing reliance on foot traffic.

Why Buy Now?

MODG’s stock trades at a 12-month forward EV/EBITDA of 10.19X, below its sector and peers. With $20.3 million in non-GAAP net income and a track record of margin expansion, the company is well-positioned to capitalize on its strategic moves.

While near-term headwinds persist, investors should focus on the long game:
1. Venue Pipeline: 15+ Topgolf locations in the works globally.
2. Brand Synergy: Combining Callaway’s golf leadership with Topgolf’s experiential model.
3. Debt Reduction: Net leverage improved to 2.1x, enabling reinvestment.

Final Take: Hold-to-Buy, Aim for Long-Term Gains

MODG’s YTD decline creates an entry point for contrarian investors. While the Leisure sector’s Zacks rank warns of macro risks, the company’s cost discipline, strategic venue growth, and tech-driven golf offerings justify optimism.

Recommendation: Accumulate shares on dips, targeting $25–$30 by late 2025 as Topgolf venues ramp up and margins expand. The separation of Topgolf could unlock significant value, making this a story to watch closely.

Investment Thesis: MODG’s diversified strengths and strategic moves outweigh near-term sector headwinds. A long-term hold-to-buy stance is warranted.