Four short sentences were enough to send the Games Workshop (LSE: GAW) share price up by about 13% when markets opened Friday morning.
In a typically brief trading update, the wargaming specialist said sales and profits were ahead of the same period last year, and that royalty income was “significantly ahead.” As a result, pre-tax profit for the six months to 1 December is expected to rise 35%, to “not less than £55m.” This suggests the group’s full-year profits will be significantly ahead of current forecasts, hence today’s share price rise.
Here, I want to explain why I think this business is so special and should continue to reward loyal shareholders. I’ll also highlight another stock with similar characteristics I think will also do well.
Addictive and profitable
Although I’ve never been a Games Workshop customer, I’ve always been impressed by the passion and commitment displayed by people I’ve known who were into Warhammer. They’d spend a lot of time and money buying and painting models, and taking part in extended gaming sessions.
You might have expected this hobby to struggle in the internet age. But that hasn’t happened. Instead, CEO Kevin Rountree has been able to extend the appeal of the Warhammer concept and make the business more profitable and faster-growing.
Alongside its core modelling and wargaming business, it’s now starting to monetise its intellectual property through television and animation deals.
A financial fortress
Rountree’s skilled management of the business has turned it into one of the most profitable firms on the London market. For example, Games Workshop generated an operating profit margin of 32%, and a return on capital employed of 75% last year. Those are outstanding figures.
These high returns mean the company generates a lot of spare cash. Shareholders get generous dividends and the company can afford to invest in new opportunities without debt. It’s a financial fortress, in my view.
GAW shares have doubled since May 2018, and aren’t as cheap as they were. After today’s news, I estimate the stock trades on about 20 times forecast earnings for the current year, with a likely dividend yield of just over 3%.
However, given the group’s ultra-high profitability, ultra-loyal customer base and continued growth, I continue to view the shares as a long-term buy.
Another proven winner?
The next company I want to look at will be more familiar to most readers. Moneysupermarket.com Group (LSE: MONY) runs the UK’s leading price comparison website. It also owns MoneySavingExpert, the consumer finance site founded by journalist Martin Lewis.
Although Moneysupermarket has some rivals, this firm is my top sector pick, thanks to its market leadership and strong profitability. Last year, MONY reported an operating profit margin of 30% and a return on capital employed of 50%. Similar figures to Games Workshop.
Growth has slowed in recent years, but the firm is working hard to deliver a new generation of services. These include more personalised and automated switching services, along with an all-new mortgage comparison service.
The Moneysupermarket share price has cooled since the summer. I think this could be an opportunity to start buying. Its shares currently trade on 19 times 2019 forecast earnings, with a dividend yield of 4.1%. I think that’s a fair price for such a profitable business.
