Games Workshop: a lesson in loyalty

‘Price is what you pay, value is what you get.’
Dan Lane
January 12, 2021

Warhammer doesn’t come cheap. 

Sure, you can pick up a few paint-them-yourself warriors cheaply but a set to be proud of can run into the hundreds, if not thousands, of pounds.

And a quick look at shares in owner Games Workshop tells a similar story. They’ve hit an all-time high at the start of 2021 after a storming run over the past five years.

The question though, is whether there is quality worth paying a premium for in each instance.

Today’s first half results from the hobbyist retailer go some way to answering that.

Profits before tax were up to £91.6m, surpassing initial expectations of “not less than £80m” a few months ago and the updated £90m predictions in December. That’s against a figure of £58.6m this time last year.

Past performance is not a reliable indicator of future results.

Shares are now up over 18x in five years and have risen more than 70% since this time last year.

If you’d have offered pre-pandemic shareholders today’s price for their shares, I’m sure there would have been smiles all round. 

Zoom out and the Covid dive last year looks like a short skirmish during a much longer game.

“It’s too late to get in now”

This is the common phrase when share prices go on a run. We look at what’s already happened and decide we’ve missed the boat.

Now, sometimes that will be the case, and we wouldn’t advocate investors ploughing into toppy-looking shares on shaky future prospects. But this is maybe the problem - looking at share prices first.

If we start by looking at spiky graphs we’ll always frame our next decision against what’s just happened, not what could happen next. 

That’s despite all the tools of the investment trade trying to give an insight into what companies might achieve next.

Stock market graphs are always backward looking, if you find one that tells the future, please let us know.

So where do we start?

Simple company valuations aren’t a bad place to kick off your investment investigations. 

Measures like Price to Earnings ratios (PE) are useful to give us a bird’s eye view of how a company is valued in comparison to its own history, its immediate peers, the wider industry and the market.

And this is where looking at Games Workshop through a valuation lens starts to offer a different perspective.

High PEs relative to all of the above can mean a stock is possibly overvalued, low PEs can mean a company’s shares are too low, given its earnings.

But quality businesses can run at high PEs consistently because the market expects the company’s growth to back it up.

With a PE north of 30 (high but not in the tech-giant league) the big question is ‘Is Games Workshop overvalued or do its growth prospects justify its price?’

Putting a price on growth

Warren Buffett put it simply, “Price is what you pay, value is what you get.”

What he’s getting at is that good quality growth doesn’t often come cheap and you might have to stump up the cash to take part in consistent earnings growth.

We’ve got used to seeing the likes of Dove soap owner Unilever and Guinness parent Diageo run at high valuations for this reason.

Now, we’re not saying that Games Workshop is a stalwart in the same league as some of the big brand stables but the argument in general is that we shouldn’t be afraid to pay a reasonable price for growth, just don’t vastly overpay.

If you keep waiting for that PE to get into the teens or lower in growing companies, or the share price to plummet, you’ll likely be the one complaining about never getting in.

We all like a bargain but if you keep waiting for the sales sometimes you miss out completely.

Let the games begin

Investors in Games Workshop will point to a few aspects of the business that might justify a high valuation, one being the amount of cash the company generates.

Net cash during the period was up by £40m. And at a time when a host of retailers have been seeking emergency loans and rent-holidays, the firm is talking about surplus cash and offering investors an 80p dividend.

And away from the financial side, chief exec Kevin Rountree this morning praised one aspect among its customers that has got it to where it is this year: loyalty.

The company has shown that knowing your customers, and providing them with exactly what they want, is no more important than in a crisis. 

And while specialist retailers can sometimes be the opposite of diverse, honing and addressing a particular niche, like Games Workshop or Hotel Chocolat for example, what they can do is dominate a small part of the market.

So, while huge multinationals with pricing power and brand monopolies can evidence good quality growth, niche operators can try to do the same on a smaller scale.

Recession readiness

One trait of the big league quality growth companies is often their ability to hold revenues steadier during a downturn than most peers. 

Their wide-reaching brands that we outsource our thinking to when we’re shopping makes that more sustainable than what we deem as frivolous purchases.

Normally we pull the purse strings in and get rid of any of the ‘nice to haves’ in times of economic strife. 

But the past year hasn’t worked like that. 

The issue now is that we just can’t get out to spend. The savings ratio among UK households hit a record high of 29.1% in September. Record sales of champagne in UK supermarkets over Christmas doesn’t scream of a nation short on cash. 

We want to find a home for our pent-up earnings but in a service-based economy, it is the services we can’t get out to use.

This could go some way to explaining why Games Workshop has been able to grow its revenues and profits so strongly.

Devoted followers willing to pay a premium for quality, more cash on hand, and a hobby well-suited to lockdown life - that’s a nice premise to build your business on.

Challenges ahead

It’s not all positive though. In today’s update Rountree said, “If current sales trends were to continue for the full year we would have c.50 stores which would not break even.”

The firm still maintains its retail stores are key to fomenting the culture and enthusiasm around the hobby but in the short-term it’s going to have to rely on those online numbers. 

The good thing is that its 26% sales growth was driven mainly by an 87% lift in online sales.

Again, we aren’t saying Games Workshop is right for you, or that its growth trajectory will continue during and after the Covid lockdowns.

But before you write off shares after skimming a rising share price graph, it’s worth remembering that good quality businesses rarely come cheap. 

Instead of initially asking whether a company is cheap or expensive, focus on the business itself first of all and keep another Buffettism in mind’ “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” 

Let us know what you think about Games Workshop on the community forum:

Important information

This should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.

When you invest, your capital is at risk. The value of your portfolio can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future results.

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