Here’s why I’ll buy this FTSE 250 growth stock next month

Andrew Woods likes this FTSE 250 growth stock and thinks it would be a good addition to his portfolio as July approaches.

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Key Points

  • Games Workshop had a compound annual EPS growth rate of 31.4% between 2017 and 2021
  • Between 2020 and 2021, pre-tax profit increased from £89.4m to £150.9m
  • The company paid a dividend of £2.35 per share in 2021 and 2022

With July just around the corner, I’ve been on the lookout for some quality growth stocks. I’ve been searching through the FTSE 250 index. While it’s got a number of great companies, one stands out to me. Let’s take a look.

Eye-watering earnings growth

In the past year, the share price of Games Workshop (LSE:GAW) has tumbled around 43%. Over the longer term in the past five years, however, the share price has flown 425%. It currently trades at 6,520p.

The company – a manufacturer of fantasy miniatures – posted increasing pre-tax profits between 2020 and 2021, from £89.4m to £150.9m. 

An attractive aspect of Games Workshop, however, is its earnings track record. Between 2017 and 2021, earnings per share (EPS) rose from 95.1p to 372.7p. 

By my calculation, this means that the firm had a compound annual EPS growth rate of 31.4%. For me, this is a mark of a true growth stock and presents a strong case for being part of my portfolio. Despite this, I always have to remember that past performance is not necessarily indicative of future performance.

In an update for the three months to 28 February, the company announced that it was paying a total dividend of £2.35 per share. This was flat year-on-year, but is at least a sign of consistency. The potential of acquiring an income stream, together with strong growth, is extremely appealing to me.

Solid revenue, but risks remain

The company released an update for the 12 months to 29 May, during which it stated that revenue for the year ended June 2022 is expected to be no less than £385m. For the year ended June 2021, revenue was £353m

Furthermore, pre-tax profits are expected to be around £155m, up from the previous year’s figure of £150.9m.

With results due on 26 July, I will be watching very closely to see if these expectations are met and how they compare with the official results.

There are risks, however, with my potential investment. The broader economic environment may not be favourable for retail businesses like Games Workshop.

With inflation on course to hit 10% this year in the UK, prices may increase. Furthermore, surging energy costs are also hitting households hard. Finally, rising interest rates mean that borrowing money is becoming more expensive.

The result of all these risks is that customers could have less money in their pockets with which to buy fantasy miniatures. This state of affairs may impact future sales figures and, as a result, revenue and profit.

Overall, this company has enjoyed stunning earnings growth over the past five years. Revenue and profit have also been solid. The mixture of growth and income makes Games Workshop all the more attractive. While there are certainly risks, I will definitely be adding this stock to my portfolio next month.        

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Andrew Woods has no position in any of the shares mentioned. The Motley Fool UK has recommended Games Workshop. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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