As far as I know, legendary investor Warren Buffett has never owned shares in Games Workshop (LSE: GAW). But one of the benefits of the Sage of Omaha sharing his investment techniques so openly is that I can use them to inform my own investing decisions. For example, when considering whether to add Games Workshop shares to my portfolio, I would look at certain aspects of the business and shares.
Here they are.
Sustained customer demand
No matter how strong a company is in its sector, if that business area is doomed to failure the business will likely struggle. Buying the best asbestos company of its day would not have helped me as an investor when asbestos stopped being used.
In fact, Buffett’s own company Berkshire Hathaway is an example. It was a US clothing manufacturing company when he bought it. But as that industry was in terminal decline, the company was never going to do well if it stuck to the rag trade. Warren Buffett has said that, “the dumbest stock I ever bought was Berkshire Hathaway”.
Buffett still made a success of the company by shifting its business focus. But he thinks he could have achieved much better returns with the same capital if he had not tied it up in a declining industry. Such is the importance of investing in an industry that has long-term potential.
I reckon the gaming market is here to stay. If anything, I expect it to grow over time. Even possible risks like a rise in digital gaming could end up attracting new customers to different forms of gaming, in my view. So I like the long-term potential of the business space in which Games Workshop operates.
Business moats
Buffett also likes a company to have what he calls a business moat, which is basically a competitive advantage that helps keep competitors at bay.
One of the attractions of Games Workshop shares to me is that the business has several moats. Its strong brand and customer relationships are key ones.
However, arguably competitors could also build a compelling brand. Another moat Games Workshop has is its own intellectual property. For example, it owns the Warhammer franchise. That makes it impossible for competitors to go up against the company with an identical range of products.
Games Workshop also has its own manufacturing operation. In fact, it emphasises, “We make things. We are a manufacturer. Not a retailer”. In my view, the business is actually a retailer too regardless of how it sees itself. But having its own manufacturing expertise and capacity is definitely another moat in my view. It does also add a risk for Games Workshop shares, though. The concentration of manufacturing means that if the firm’s main factory was forced to close production even temporarily, sales might fall. That could hurt the share price.
Do Games Workshop shares offer me attractive value?
From a business model perspective, I think Games Workshop shares are a classic Buffett-style investment – if I buy them at the right price.
Right now, they trade on a price-to-earnings ratio of 20. That is not cheap. But I think it is reasonable for what I see as a great business. I would happily tuck the shares away in my portfolio for the long term.
