There’s a FTSE 250 stock that I think might be a better business than Alphabet (NASDAQ:GOOG). It has better profitability metrics, lower cash requirements, and trades at a more attractive price.
Google’s parent company is an incredible business – I’m not saying for a moment that it isn’t. But I think there’s a UK stock that’s a better buy right now.
Alphabet
In my view, the fact that Alphabet is one of the best companies in the world is beyond dispute. How it compares with Apple, Berkshire Hathway, or Tesla might be up for debate, but it’s right there with them.
Furthermore, I’m a firm believer in the view that what matters for a great investment is the quality of the underlying business. Finding a great company is much more important than getting a bargain price.
What makes Alphabet a great business, in my view, comes down to three things. These are (i) its strong cash generation, (ii) its impressive growth, and (iii) its dominant competitive position.
I think, though, there’s a FTSE 250 company that is a match for Google’s parent company in all of these areas. And it happens to trade at a better price.
Cash generation
The stock is Games Workshop (LSE:GAW). A closer look at the toy company’s credentials reveals some really impressive profitability.
First, the FTSE 250 company has better margins than Google. Games Workshop achieves gross margins of 68% (vs. 55%) and operating margins of 36% (vs. 26%).
Returns on fixed assets are also higher. Games Workshop generates £170m in operating income using £105m in fixed assets (a 161% return), whereas Google earns $75bn using $127bn in fixed assets (a 59% return).
Lastly, 85% of the cash Games Workshop generates through its operations becomes free cash flow. That compares favourably with the 71% conversion ratio for Alphabet.
Growth and intangibles
Alphabet’s core business – Google Search – is well-protected by its dominant market position. This is certaintly part of what makes it a great business.
But Games Workshop also has good protection for its core business. Its intellectual property rights make it virtually impossible for competitors to copy what it does.
Over the last five years, both businesses have grown impressively. In fact, earnings per share growth at both Games Workshop and Alphabet has averaged 15% per year.
The biggest question for Games Workshop shareholders, I think, is whether or not the company can keep this up. That’s the biggest risk, but the company’s size means it might well have scope to continue.
A stock to buy?
To reiterate, I’m not saying anything negative about Alphabet here. The company’s profitability metrics are impressive and its competitive position might well be unique.
Games Workshop, though, looks to me like it might be just as good, if not better from a business perspective. And the stock trades at a price-to-earnings (P/E) ratio of 24, compared to 30 for Alphabet shares.
To me, this makes the investment equation simple. Right now, I think Games Workshop is a much more attractive stock to buy than Alphabet.
