I think Games Workshop (LSE: GAW) is one of my best stocks to buy now, and would happily add to my position with a £1,000 investment now.
The investment case
When I look to buy shares, I search for the following: a good management team, an economic moat, and financial growth. I think Games Workshop demonstrates all of these characteristics.
#1 Good management team: Kevin Rountree is the current CEO after taking the top job in 2015. Since he became CEO, the share price has rallied from 520p to 7,740p today, or a return of 1,388%. I put this down to his leadership of the company. He joined Games Workshop back in 1998 as an assistant accountant and worked in various roles before becoming the CEO, so he knows the company very well. He’s also supported by Rachel Tongue as CFO, who has been at the company since 1996. The leadership of Rountree and Tongue should lead to further share price returns in the years ahead, in my view.
#2 An economic moat: Games Workshop has been developing its games and characters for decades. It would be very hard for a competitor to replicate this long history. There are some parallels to Disney and how it’s developed its own fantasy worlds that keep fans engaged with the company. Games Workshop is able to generate double-digit profit margins too, which I think reflects the strong economic moat in the business.
#3 Financial growth: It has grown revenue from £119m in fiscal year (FY) 2015 (the 12 months to 31 May 2015) to £353m in FY21. Earnings per share have increased from 42p to 372p over the same period. This is attractive growth in my view. What’s more, revenue increased again in the six months to 28 November, suggesting there’s momentum in the business.
Even the best stocks to buy now have risks
There are always risks to consider with any investment. For Games Workshop, the biggest risk I see is if players stop buying its games. It would be very easy for a new video game, or even a competitor’s tabletop game, to be released and steal market share. The video game industry is very competitive, so this could draw fans away from Games Workshop.
There’s also been a slowdown in growth for FY22. Revenue is expected to increase by almost 9%, and EPS by over 4%. This is a big decrease against the growth rate the company achieved in FY21, where revenue rose by 31% and EPS by 69%. Games Workshop is subject to cyclicality, depending on its major game release schedules. There was a big update to its key game in FY21 which boosted the growth rates. Nevertheless, it’s something to monitor going forward.
Final thoughts
The share price has weakened recently, so there could be an excellent buying opportunity for me. The current forward price-to-earnings ratio is 20. This has fallen from 21 last year, and a much higher 37 in FY20.
I think the risk-reward balance is compelling for me at this share price. I’m going to buy Games Workshop for my portfolio.
