Golf was one of those activities that was somewhat boosted by the Covid-19 pandemic, as golf is an outdoor sport with built-in social distancing. However, even without that boost, gold if experiencing long-term growth. New Wall Street reports point to an acceleration of rounds played, club sales and time spent at golf clubs in recent years, despite a slight deceleration in October.

Spending on golf equipment and apparel this year has slowed down somewhat compared to 2020 and 2021. Specifically, spending on clubs dropped 7.2% from the prior year in October 2022 while rounds played were down 1.1% according to Bank of America (NYSE:BAC) Securities. But when compared to 2019, spending on all three major categories for golf (clubs, rounds, spending at courses) remains above pre-Covid levels. There are an estimated 66 million golfers around the world today with a retail end-market spending value of approximately $13.5 billion. The overall golf industry is valued at $90 billion when including course spending and other areas. Juniors and women represent the fastest growing demographic of the sport.

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One of the largest stocks to play the global golf industry is Acushnet Holdings Corp. (NYSE:GOLF). The companys flagship brand is Titleist, which makes golf clubs, and apparel. Other brands include Footjoy shoes and apparel, Scotty Cameron putters, Vokey Design wedges, Pinnacle golf balls and KJUS branded ski and golf apparel. Titleist is the number one ball in golf and FootJoy makes the umber one shoe brand and golf glove. The company has the largest number of active patents in the industry and operates six major research and development facilities, employing over 200 scientists, chemists, engineers and experience technicians.

Acushnet was founded in 1910, currently has a market capitalization of $3.2 billion and expects to generate over $2.3 billion in revenues this year. Here's why I believe this stock is the ideal way to play the growing golf industry.

Financial review

Acushnet's most recent earnings report was for the third quarter of 2022, which showed a 7.0% increase in sales year-over-year, or 13.5% on a constant currency basis. The company has a large international business that represents about 48% of revenues, so sales were negatively affected by the strong dollar.

Third-quarter adjusted Ebitda increased 23.0% to $86.5 million and net income increased 31.8% to $51.8 million. The company said it is still experiencing inflationary costs and supply chain issues. The company's CEO stated,

The company maintains a reasonably safe balance sheet with $108.5 million in cash and $432 million in debt. Ebitda is expected to be approximately $330 million in 2022, so the leverage ratio is very low.

During the quarter, the company repurchased 869,368 shares of stock on the open market at an average price of $47.82 for a total value of $41.6 million. The company has a positive three-year average share buyback ratio of 1%.

Valuation

Company guidance for full fiscal 2022 calls for revenues of approximately $2.2 billion, which would represent a constant currency sales increase in the 9.0% to 10% range. Adjusted Ebitda is expected to be approximately $330 million. Consensus analyst earnings per share estimates for 2022 are $2.69. Analysts are expecting earnings per share of around $2.65 for 2023. That puts Acushnet stock selling at 17 times the current year's earnings estimates. The forward enterprise-value-to-Ebitda ratio is 10.

The GurFocus discounted cash flow calculator gives a fair value close to current price levels when I input $2.69 as the starting point for earnings per share and estimate a long-term growth rate of 8.0% per year.

The company currently pays an annualized dividend payment of $0.72, which equates to a 1.63% dividend yield. The company has raised its dividend each year since the dividend program was started in 2017.

Guru trades

The only guru that currently owns this stock is Jeremy Grantham (Trades, Portfolio) as per the latest round of 13F and mutual fund reports. Catherine Wood (Trades, Portfolio) and Jim Simons (Trades, Portfolio) sold out in the third quarter.

Summary

Acushnets dominant market share position should keep driving strong cash flow going forward and create operating leverage with continued growth. If inflationary costs subside to some degree and supply chain issues become manageable, double-digit earnings growth could be achievable in my opinion.

In addition, with an underleveraged balance sheet, future tuck-in or major acquisitions can provide another growth driver. Although the company may be fairly valued based on the DCF model, there could still be long-term upside for the stock in my view.

This article first appeared on GuruFocus.