Are Games Workshop shares worth considering?

Games Workshop shares are up an impressive 44% in 2023 so far. But is there more room to grow? Gordon Best takes a closer look.

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Games Workshop (LSE: GAW) is a British multinational miniature wargame manufacturer and retailer. The company is best known for its table-top miniature wargame Warhammer 40,000. Games Workshop shares are listed on the London Stock Exchange and are part of the FTSE 100 index. The shares have been on a strong upward trend in recent years, almost doubling in the last five years.

With those kind of returns, investors will naturally be interested. I’d want to consider these factors before investing in Games Workshop shares.

The company’s fundamentals

Strong financial performance — The company generated £470m in revenue in 2022, with a profit margin of 29%, and earnings per share (EPS) of £4.09. The company also has an extremely strong balance sheet, with an extensive range of physical assets and inventory, and notably no debt at all for the last five years.

Brand recognition — The company has a strong brand and a loyal customer base. The company is also the market leader in the table-top miniature wargame industry.

Growth potential — The company is expanding into new markets, such as China and the US.

Dividend — The company pays a heathy dividend of 3.5%. Nothing spectacular, but impressive in a company growing as rapidly as it has been. These payments rose as high as 8.4% back in 2016, but dropped significantly during the pandemic. With no debt to pay, I think it is reasonable to expect dividends to return to these levels in time.

Valuation — Games Workshop shares are currently trading at a premium valuation. A discounted cash flow calculation suggests the shares may be 103% overvalued at present. Furthermore, the price-to-earnings (P/E) ratio of 25.8 times is well above the average of the leisure sector at 10.2 times.

Is there more room to grow?

With the global pandemic now seemingly behind us, the demand for stay-at-home entertainment has declined significantly. With people now able to go out for entertainment, the market for Games Workshop products may have peaked. Furthermore, Games Workshop is exposed to the risk of competition from other miniature wargame manufacturers. With such a high valuation, it wouldn’t take much for investors who have seen healthy profits taking the money and looking elsewhere.

Profit margins have fallen slightly since last year, down to 29% from 31%. However, profits remain strong, and demand appears to be consistently high. With a return on equity (ROE) of 57.3%, and return on capital employed of 61%, Games Workshop is executing its strategy incredibly well, meaning that healthy profits can be made even if demand were to further decline.

Management in the company have an excellent reputation and extensive experience in the sector. CEO Kevin Rountree has been in the role for nearly nine years, and the average tenure for the board of directors is also nearly nine years. Insiders have also been buying shares in the company at a far greater volume than any sales. This indicates there is likely confidence in the long-term performance of the company from those at the very top.

Am I buying?

Games Workshop shares have been a fantastic investment in recent years, as customers looked for engaging products when forced indoors. However, with declining popularity of table-top miniature wargames, high valuation, and growing competition from other miniature wargame manufacturers, I’m keeping clear for now.

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 assessed. Consider taking independent financial advice.

Gordon Best has no position in any of the shares mentioned. The Motley Fool UK has recommended Games Workshop Group Plc. 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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