Topgolf Callaway Brands Corp.'s (NYSE:MODG) Shares Climb 27% But Its Business Is Yet to Catch Up

The Topgolf Callaway Brands Corp. (NYSE:MODG) share price has done very well over the last month, posting an excellent gain of 27%. Looking back a bit further, it's encouraging to see the stock is up 53% in the last year.

Even after such a large jump in price, it's still not a stretch to say that Topgolf Callaway Brands' price-to-sales (or "P/S") ratio of 0.6x right now seems quite "middle-of-the-road" compared to the Leisure industry in the United States, where the median P/S ratio is around 0.9x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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What Does Topgolf Callaway Brands' P/S Mean For Shareholders?

Recent times haven't been great for Topgolf Callaway Brands as its revenue has been falling quicker than most other companies. Perhaps the market is expecting future revenue performance to begin matching the rest of the industry, which has kept the P/S from declining. If you still like the company, you'd want its revenue trajectory to turn around before making any decisions. Or at the very least, you'd be hoping it doesn't keep underperforming if your plan is to pick up some stock while it's not in favour.

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How Is Topgolf Callaway Brands' Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Topgolf Callaway Brands' to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 3.6%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 5.3% overall rise in revenue. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Shifting to the future, estimates from the twelve analysts covering the company suggest revenue growth is heading into negative territory, declining 3.1% over the next year. That's not great when the rest of the industry is expected to grow by 4.9%.

In light of this, it's somewhat alarming that Topgolf Callaway Brands' P/S sits in line with the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the negative growth outlook.

The Bottom Line On Topgolf Callaway Brands' P/S

Its shares have lifted substantially and now Topgolf Callaway Brands' P/S is back within range of the industry median. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our check of Topgolf Callaway Brands' analyst forecasts revealed that its outlook for shrinking revenue isn't bringing down its P/S as much as we would have predicted. With this in mind, we don't feel the current P/S is justified as declining revenues are unlikely to support a more positive sentiment for long. If we consider the revenue outlook, the P/S seems to indicate that potential investors may be paying a premium for the stock.

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If you're unsure about the strength of Topgolf Callaway Brands' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.