Callaway Golf Co (CALY) stock intrinsic value fair value estimate & owner earnings analysis

Callaway Golf is now a golf-only company. In 2025 and early 2026 it sold the Jack Wolfskin outdoor brand to Anta Sports and sold 60% of Topgolf and Toptracer to funds managed by Leonard Green & Partners, at an equity value of about $1.1 billion, effective January 1, 2026. Callaway kept 40% of Topgolf. It used the roughly $800 million of Topgolf proceeds, plus cash on hand, to repay more than $1.4 billion of borrowings in the first half of 2026, including its Term Loan B and its $258 million of convertible notes. What remains is the Callaway club and ball business, the Odyssey putter brand, and TravisMathew and OGIO apparel and gear. At June 30, 2026 the company held about $278 million of cash against about $74 million of debt, most of it a seasonal asset-based credit line and finance leases. How we measured earnings. The company has restated its last three years for the business it kept. On that basis, owner earnings were $115 million in 2023, $92 million in 2024 and $82 million in 2025. Owner earnings here mean operating cash flow, with working-capital swings removed, after stock compensation and the capital spending needed to maintain the business. These years carried $55-65 million a year of cash interest on debt that no longer exists. Shareholders now own the business before those lenders, so we value the cash it produces before interest: about $180 million in 2023, $150 million in 2024 and $136 million in 2025. We removed working-capital swings, which matters most in 2025: that year's reported operating cash flow was flattered by about $82 million of released working capital, chiefly a $36 million rise in accrued pay. We anchor on the $150 million median of those three years. Earlier years are not comparable, because they included Topgolf's venue-building programme, Jack Wolfskin or a much smaller pre-2017 company. 2025 showed the low end, with tariff costs of about $34 million and falling sales. The first half of 2026 was better. Operating income was $253 million against $177 million a year earlier, and gross margin was 48.7% against 44.5%. Part of that came from about $11 million of tariff refunds that will not recur. Base case, $14.25 a share. Business cash flow is $150 million in 2026. That is above 2025's $136 million, supported by two reported quarters of higher operating income. It then settles at $140 million a year with no growth credited. Club and ball sales have not grown in three years: revenue was $2.13 billion in 2023, $2.08 billion in 2024 and $2.06 billion in 2025. Gains in market share, the new margin level and any rebound in golf participation are not secured, so we leave them out. We let the earnings continue beyond ten years because the Callaway and Odyssey brands have held leading positions in drivers and putters for over 30 years through repeated product cycles. Valued at 6%, the business is worth about $2.34 billion. We add about $100 million of cash beyond the company's seasonal working needs. We add $150 million for the 40% Topgolf stake, below its $214 million book value: Topgolf is still losing money, and Callaway's share of its losses was $29 million in the first half of 2026 including tax effects. The business owes almost nothing, so the debt deduction is negligible. On about 182 million diluted shares, the total is about $14.25. Bear case, $8.69 a share. Golf equipment is a discretionary purchase, and the industry has had a deep downturn before. After the 2008 financial crisis, Callaway's sales fell about 15% in 2009 and the company lost money for several years before recovering. This case repeats that pattern from today's base. Business cash flow falls to $120 million, $90 million, $20 million and then a $30 million loss in years one to four. It recovers to $110 million by year nine, below today's level because it assumes some lasting loss of share. The Topgolf stake is given no value, since a losing venue business with its own debt may never return cash to a minority owner. The business is worth about $1.48 billion, plus $100 million of surplus cash. The company has no meaningful debt, so it can ride out the loss years without raising capital. That is the main improvement since our previous review, when the debt was still outstanding. Bull case, $18.41 a share. The first-half 2026 gross margin gains hold, and business cash flow returns to about $185 million, the level of 2023, with no further growth. The Topgolf stake is valued at its $214 million book value. What changed. Our previous figures used a different method and are not comparable. In the business itself, the debt repayment has now happened, two quarters have shown better margins, and the company has started buying back stock: about $84 million in the first half of 2026, with $120 million of authorization left. Our base view of earning power is slightly lower than before. Normalized for the working-capital release, 2025 cash generation was weaker than it first appeared. Risks we cannot model well. This management team approved the Topgolf merger, which led to a $1.35 billion goodwill write-off in 2024. The money now being returned could be spent on another large acquisition. Tariffs on clubs made in Asia remain a live cost. About $50 million of hoped-for refunds are one-time, and future rates are not in our control. The Topgolf stake has no market price, and Callaway does not control when or whether it is sold. Margin-of-safety price. We are only moderately sure of the earnings level. There are three restated years, they span $136-180 million of business cash flow, and the newer, higher margins have only two quarters behind them. The worst plausible outcome is a multi-year golf slump like 2009-2012, with the Topgolf stake ending up worthless and management spending the cash poorly. Because the company now carries almost no debt, it would survive that. Its brands, inventory and receivables are real assets, and no lender could force a sale. If we are wrong about the two things most likely to go against us, sustainable cash flow nearer $110 million and a worthless Topgolf stake, the shares are worth roughly $9-10. The company pays no dividend, so in the meantime any return comes from cash generation and buybacks. At $6.50 a share, the equity would be valued at about $1.2 billion, or roughly $1.0 billion after the surplus cash and a modest value for the Topgolf stake. That price covers a debt-free business producing $140-150 million a year, a cash return of about 14%. Over three to four years, that cash and the buybacks it funds should lift per-share value toward at least the bear-case level of about $9 even without any recovery in golf demand. That implies roughly a 20% annual return, and more if the base case holds. Above about $6.50, a 20% return would depend on the base case rather than survive the bear case, so that is where we set the price.