Knobias Clip Report (9-27-2007)

Sumbmited From Knobias ClipReport

ADGO: New Hybrid Clubs Could Increase Profits

The official golfing season came to an end recently with the Tour Championship which has now been renamed the FedEx Cup. Even with the end of the official PGA season, there are still numerous tournaments with some of the young up and comers and savvy veterans that try to grind out a living playing golf.

One of those tournaments is in the hometown of Knobias. The Viking Classic is being played this week at Annadale Golf Club in Madison, MS. The tournament has become a favorite of many in the area as being one of the only instances a top professional sport is played in state.

With golf being on the agenda for many this weekend, it only seems fitting to highlight a name in the small cap space related to the sport.

One name that seemed extremely overlooked was Adams Golf Inc. (ADGO). The Company was founded in 1987 by Barney Adams in Texas and concentrated on custom fitting and new product developments. The Company’s first big hit was the Tight Lies fairway wood.

With the low profile and center of gravity, the club created an uproar with pros and weekend players alike, quickly establishing a name for itself with the niche woods. Currently, the Company offers more than one category of product within each segment of the industry. Drivers, fairway woods, hybrids, irons, integrated sets, and wedges are all available with the Adams brand.

The Company is clearly an underdog in the golfing industry with Nike, Titliest, and Callaway dominating the space. Nike (NKE) is a huge conglomerate offering many other products in many different sports. Titliest is a part of Fortune Brands (FO) which also offers alcoholic drinks and home and hardware products. Callaway (ELY) is a pure play in the sector and is comparable to the Adams name.

ELY trades at around a 23 price to earnings multiple on a GAAP basis. The Company also has $55 million in short term debt with only $48 million in cash on hand according to their latest earnings report. On a GAAP basis, the Company also sports a 112% earnings growth rate over the trailing twelve months. Again, this is GAAP and not non-GAAP adjusted numbers. On an adjusted basis, the Company has a price to earnings ratio of 20 with a growth rate of 66%.

Adams on the other hand sports a GAAP price to earnings ratio of 6, $7.8 million in cash, and no short term or long term debt. Earnings growth in the trailing twelve months is 65%. The numbers may be skewed somewhat from an income tax benefit from tax loss carryforwards. Also of concern are the $10.6 million in accounts payable and the $10.5 million in accrued expenses. None the less, the name still looks fairly undervalued when comparing it to Callaway.

Add to the fact that the Company recently announced the launch of their new Idea a3OS Hybrid Irons and the name becomes even more compelling. The irons have been noted as the easiest-to-hit set of irons in golf. The engineers integrated six hybrids with two cavity-back short irons to achieve results for maximum-game improvement.

In any event, as the baby boomers hit the retirement stages of their careers, golf will undoubtedly take a larger portion of their time and dispensable income. With golf being an extremely hard sport to master, any type of improvement in technology has always been met with extremely sound demand. The clubs, though possibly not fit for all who play, could make the game much easier for this aging group of retirees as anyone who has ever played knows that hitting hybrids are much easier than traditional clubs. In any event, with a clean up of the accounts receivable and accrued expenses cleanup without acquiring debt or dilution, along with a favorable response from their new irons, the name is certainly one to follow over the coming months. Investors would be wise to watch.



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