Games Workshop (LSE:GAW) designs, manufactures and sells the popular fantasy miniatures series Warhammer. Although I never played it as a child (due to the extremely high prices and little pocket money) the stores were always full of young enthusiasts when I visited. Those gamers are now adults with full pockets and Warhammer is still thriving.
Strong revenues
Despite its long history, the firm’s meteoric 388% share price rise only started in 2016, so I suspect its success is largely due to the influence of the CEO Kevin Rountree. He took over in 2015 and outlined a new strategy that has seen profits rise 342% in the last three years. Nerd culture is known for its attachment to characters and stories and companies can fall foul if players feel they are being overexploited for profit. Mr Rountree has done very well to get the fans on board, bringing back a number of popular products and features that had been discontinued under his predecessor.
This loyalty to the fans seems to be paying off handsomely as players are more than happy to give back to the company by paying what I consider eye-watering amounts for unpainted pieces of plastic. Following the improvement in sales and management, the operating margin has increased from 14.3% in 2016 to 33.9% for 2018. This provides a good flow of cash that management can reinvest in the company and pay out as dividends.
The dividend yield currently stands at 4.1% and is covered 1.5x, this is generous for a company that has grown so quickly over the last few years. The business has an excellent return on reinvested capital so I wouldn’t mind it being a bit greedier and investing for a bit more growth. No doubt that shareholders are happy to have the cash though.
International growth
While revenue has nearly doubled since 2016, most of the increase in profitability has come from improving the operating margin. However this is probably as good as it can get. The UK also seems to have topped out with a net three stores closed last year. It is now focusing on the US and Germany, which are very big markets. The US has seen the most openings with 25 new stores and with the popularity of nerd culture across the pond, I don’t see why Warhammer shouldn’t succeed. North America is currently the largest buyer for Warhammer products for independent stores so it looks like there is already good demand in this huge market.
Games Workshop currently has a price-to-earnings ratio (P/E) of 17.7 which seems reasonable considering its past and potential growth. It has only briefly traded at a P/E above 23 in its history so I think this share has always been cheap relative to its quality and growth. This should give it some valuation protection when its sales inevitably starts to slow in the future.
For me, this is a very appealing share because of its high quality returns and it has defensive characteristics which give some comfort in this market. My main concern is that most of its growth could be in the past, but the size of the European and North American markets makes me optimistic for the future of this company, even if growth slows.