At the Berkshire Hathaway Annual Shareholder Meeting on Saturday, Warren Buffett said that he’s having difficulties finding investments that are just too good to pass up. But over here in the UK, I’m looking at a FTSE 250 stock that I think might be a great opportunity for me in May.
Buffett always says that he looks for the same things when investing in a business. He looks for a wonderful business with a strong competitive advantage. And he looks to buy equity in that business at a fair price.
The stock on my radar at the moment is Games Workshop (LSE:GAW). I’ve thought for some time that it might be a wonderful business and I’m starting to think that I might see it at a fair price in May.
A wonderful business
When Buffett looks for a wonderful business, he looks at how efficiently the company can use its assets to generate cash. He measures this by comparing the amount that a company makes in operating earnings to the amount that it has invested in tangible assets — specifically, property, plant, and equipment.
In discussing Kraft Heinz, Buffett has said that it’s a wonderful business because it can generate $6bn in operating profits using $7bn of tangible assets. By these standards, Games Workshop is arguably even more impressive, generating £148m in operating profits using £96m of tangible assets.
A competitive advantage
It’s also extremely important that a wonderful business is protected from competitors. Protection can come from several sources. A company might have a lower production cost than its rivals. It might be difficult for its customers to switch to another provider. Or it might be that the business has an intangible asset — such as a powerful brand — that makes it hard to displace.
Games Workshop’s core business is protected by a strong intangible asset. The company makes its money by designing and selling miniatures and games, most notably as part of the Warhammer franchise. Its business is protected by intellectual property rights that mean that no other companies can compete with it by producing Warhammer products of their own unless it licenses them to do so.
A fair price
The current Games Workshop share price suggests a total value of £2.4bn for the entire business. I think that’s still a little expensive and I feel that the price is the biggest risk associated with investing in the stock today. But the share price has been falling lately. Since the beginning of the year, the stock has fallen by more than 25%.
The company generated £148m in operating income. That’s an investment return of around 6.2%. I envisage Games Workshop’s earnings growth being steady, rather than spectacular, over the next decade. But on average, I would anticipate earnings growth of around 15%.
If I’m right about that, then the average return on an investment today will be around 12.56%, which is about the kind of return that I’d like to aim for. If earnings growth comes in at 10%, then the return comes in at 10.35%. While I’m looking for a little bit more of a margin of safety, I’ll be buying this stock in May if I see it at £62 per share.
