When a business has been as successful as the FTSE 250’s Games Workshop (LSE: GAW), it’s okay for the chief executive to blow the company’s own trumpet.
So, I welcome CEO Kevin Rountree’s comments in today’s half-year results report when he declared: “Another cracking performance from a truly amazing, global team.”
He went on to point out the firm has just delivered a “solid” outcome over the past six months. And that builds on “the great progress and profitable growth we have been consistently delivering over the last five years.”
The Games Workshop growth story
I agree with every word. The fantasy miniatures producer has grown its business and profits in spectacular style. And shareholders will have little to complain about because the stock has been a great investment by most measures. Five years ago, for example, the share price stood near 540p. Today, the stock changes hands near 10,900p.
Growth has been impressive and well balanced over the period. The record shows annual advances in revenue, earnings, cash flow and shareholder dividends. And the share price rose to reflect the underlying business progress.
But that wasn’t the only driver, of course. Whenever a growth story becomes well known, we tend to see a valuation up-rating. And that’s exactly what happened with GAW.
Today, the forward-looking earnings multiple for the trading year to May 2022 is about 30. And City analysts have penciled in an earnings increase of around 8.5% for that year. If we look at popular ways of analysing growth shares, one method compares the rate of earnings growth to the earnings multiple. By that measure, the shares are starting to look expensive.
And that could be one reason the share price has slipped back this morning despite the blistering figures the firm just posted. Year on year, revenue rose almost 26% in the first half of the trading year, cash from operations advanced nearly 66% and earnings per share elevated by around 55%.
A well-defended trading niche
However, despite the stock weakness today, GAW has a strong, well-defended trading niche and is expanding abroad. In the US, for example, sales are almost as large as the revenue derived from the UK and continental Europe. The outlook is positive and the growth story could have much further to run.
At the core of its business model, GAW makes fantasy miniatures for hobbyists to collect. But that wouldn’t work well unless the firm’s customers were totally immersed in the fantasy universe and experience the company has developed over decades. Indeed, the Warhammer brand delivers escapism for an“enthusiastic and loyal fan base.”
In one sense, the company has created and developed its own market. And it seems unlikely any competitor could disrupt GAW’s position simply by throwing money at the challenge. Creating a viable competing experience will probably take time – lots of it.
So, shares in Games Workshop have potential as long as I’m prepared to play the long game and remain invested for years. And I find today’s dip in the share price to be attractive in that context.