Every so often, the market throws up an opportunity that’s hard to refuse. For me, that’s exactly what’s happened with a FTSE 250 stock that I consider to be one of the best businesses in the UK.
It’s also one I’m already invested in.
Slowing sales
Shares in fantasy figurine maker Games Workshop (LSE: GAW) tumbled earlier this month as it released a half-year update to the market.
As well as stating it was trading in line with expectations, Games said it was likely to post core revenue of “not less than £235m” and core operating profit of “not less than £82m” for the first six months. Both numbers were significant improvements on the previous year — £212.3m and £70.7m respectively.
So what gives? Well, these numbers do suggest a slight slowdown in sales in the second quarter. In addition to this, the market didn’t like that the company anticipated a fall in licensing revenue and profit.
The former was likely to drop from £14.3m to roughly £12m while the latter would dip from £12.9m to around £11m.
Fall overdone
Naturally, I wasn’t exactly jumping for joy when I saw a double-digit drop in the share price on the day. But neither did I panic.
A fall in sales isn’t surprising given that many hobbyists would have spent their spare cash earlier in the year when the company launched the 10th edition of Warhammer 40k. The ongoing cost-of-living crisis will also have played a role.
The dip in licencing revenue is unfortunate but hardly terminal considering the company recently reached an agreement with US giant Amazon to bring its game to the screens. I’m confident things will get back on track in due course.
Valuation risk?
However, there’s one thing that’s often said about Games Workshop is that its valuation is usually pretty steep. I think that’s fair, at least initially. A price-to-earnings (P/E) ratio of almost 22 does feel rich compared to a lot of other UK stocks. And that’s after December’s fall is taken into account.
If the next update fails to calm nerves, the shares could be hammered again. Then again, the deeper I dig into the fundamentals, the more this price tag seems fair.
I can’t pretend to be an expert on its products. But I do know that Games exhibits many of the quality characteristics I look for in an investment. These range from a dominant market position to sky-high margins to consistently excellent returns on the money management invests in the business. Out of interest, these have always been things that master investors like Warren Buffett and the UK’s own Terry Smith look for.
On top of this, the firm has an exceptionally robust balance sheet. A lot of other FTSE 250 firms can’t say the same.
Temporary setback
Taking the recent price action into account, I’m not sure I can hold off buying more shares in this brilliant business. No stock is immune to shocks or earnings cyclicality. But I struggle to see how Games Workshop won’t bounce back and continue to reward investors like me.
And if the economic background does improve in 2024, that could be a catalyst for aficionados to splurge even more of their cash on the company’s products.
Time to look down the back of the sofa.
