2005: Business - Resurgent Aldila wields big stick

Pete Mathewson has become that rarest of golf executives: one with Wall Street groupies.

The analysts and investors who phoned in late last month to hear Mathewson, Aldila’s chief executive, deliver the shaftmaker’s second-quarter earnings sounded less like hardened financial rainmakers than smitten schoolgirls hoping for an autographed 8” by 11”.

“Terrific work,” said one analyst.

“Great quarter,” said another.

“Congratulations,” chimed another.

It’s good to be Pete Mathewson these days. Aldila, which was posting large losses just a few years ago, now looks more like a growth stock – another rarity in golf. Its share price has doubled over the past year and is pushing $27, a level not seen in nearly seven years, gross margins are back up in the 40 percent range not seen since the heady days of the mid-1990s, and consumers still can’t seem to get enough of Aldila’s ubiquitous NV shafts.

Not bad, considering the financial hole into which Aldila had fallen. It was only a few years ago that Aldila’s shares could be had for less than $2, its average shaft prices were down nearly 60 percent from the titanium-fueled boom years of the 1990s, and gross margins had fallen into the teens.

Mathewson wasn’t merely lacking for financial groupies. He wasn’t even bothering to hold quarterly earnings calls.

“There wasn’t enough interest,” Mathewson says simply.

That’s all changed. Graphite shaft manufacturers have enjoyed a revival the past two years, driven by the power of branded products, and Aldila, because it is a publicly traded company, has been the most visible example of this. It might be an overstatement to call the NV the shaft that saved the company, but it certainly provided a much-needed lifeline during difficult times.

Those financial problems came to a head in 2001, when Aldila took a staggering $54.9 million writeoff, leading the company to report a net loss of $51.4 million. The company still was losing money in 2003, but there were signs of a recovery. Sales of lower-margin shafts fell, as did total unit sales, but average selling prices rose 11 percent as sales of branded products jumped 78 percent compared with 2002.

By 2004, the NV product line had taken on a life of its own, propelling a 271 percent increase in Aldila’s branded shafts as average selling prices rose 22 percent, and the company swung to a $9.3 million profit.

In simplest terms, says Hank Miller, an investment adviser for RBC Dain Rauscher, “They were able to substitute a higher-margin business for a lower-margin business.”

Miller jumped aboard the NV bandwagon two years ago after a friend raved to him about the shaft’s performance. He looks for growth stocks with high margins, and he thought Aldila, then selling for $3 a share, might fit the bill. He remains enthusiastic, noting that Aldila’s backlog of orders was higher at the end of the second quarter than the first. If not for concerns that demand for the NV might eventually fizzle, Miller said the company’s shares could be rising even faster.

Aldila’s return to fiscal health, Mathewson notes, roughly coincided with the USGA’s decisions to regulate the size and performance of drivers. Rather than focusing on sales of low-margin stock shafts, companies such as Aldila, Fujikura and Graphite Design had begun marketing much more expensive, exotic shafts that became a key selling point for metalwoods manufacturers.

“The time was right. They were needing something with the head size boxed in at 460cc and the (coefficient of restitution) at .83,” Mathewson says.

He also believes Aldila has benefited from the fact that it is vertically integrated, operating its own prepreg and carbon-fiber plants. Mathewson notes that Carbon Fiber Technology LLC – in which Aldila has a 50 percent stake – “was put in at the wrong time” and initially contributed to the company’s financial problems. Now, with increased worldwide demand for carbon fiber and rising costs, “It’s an asset,” he says. Aldila produces more than 60 percent of the carbon fiber it needs.

The company has experienced some hiccups. Its One shaft, the first branded product in Aldila’s comeback campaign, suffered from a “complicated message” – a broad selection of tip stiffness, weights and flexes – and poor cosmetics, Mathewson acknowledges.

But he’s convinced the NV “still has incredible momentum,” particularly with line extensions into hybrid clubs and irons.

If Mathewson is right, his new-found popularity onWall Street won’t be short-lived.

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