As a long-term investor, I usually think in terms of years or even decades. Take Games Workshop (LSE: GAW) as an example. Over the longer period, Games Workshop shares have performed very handily. Over the past five years, they have more than tripled. On top of that the company is a regular dividend payer.
Over a 20-year timeframe, the results have been superb. Even ignoring the dividend income, Games Workshop shares have soared by 1,255% in the past two decades.
Could investing in the Warhammer maker today possibly set me up for great financial returns in coming decades?
What drives long-term stock market returns?
As any fantasy role-player knows all too well, what has happened in the past is not necessarily an indication of what will come in future.
Games Workshop’s strong track record might be the result of a sound business strategy that has been well-executed. On the other hand, it could reflect fortunate circumstances that may now have changed.
On top of that, business performance alone is only one element of what can make a share an attractive purchase. The price I pay matters, so valuation is important.
If I overpay, even a great company can make a poor investment.
Assessing the business case
The publication of Games Workshop’s interim results today (9 January) offers an opportunity to consider the current state of the business, as well as its outlook.
I think the report shows not only that the business is in robust health, but also that its future could be very bright. Revenues were up 11% compared to the same period last year, reaching £236m. Profits before tax rose 14%, to £95m.
Those figures demonstrate a couple of different things I like about the business model.
The profit margins are high. Four out of every £10 the company made in revenue was profit, even once the company’s costs (except taxation) are taken into account. The business is in growth mode at both the top and bottom lines.
On top of that, profits grew faster than revenues. That suggests the business has economies of scale. Thanks to its intellectual property, for example, the company can grow sales without needing to plough huge sums into research and development or marketing. So profit margins could be even higher in future.
As the track record of Games Workshop shares suggests, the business model is superb. I think it could yet produce even better results.
The business said it continues to perform well. Recent developments bode well, including an announcement that Amazon might turn some of the firm’s fantasy worlds into television series or films.
Is now the time to buy?
That development is not guaranteed to happen though.
There are risks. The company’s concentrated manufacturing footprint makes it susceptible to a factory shutdown, for example.
But on balance I think its business model is highly attractive and would be happy to own a stake of a company like this one.
At the moment, Games Workshop shares trade on a price-to-earnings ratio of 24.
That valuation remains a little rich for my tastes. Paying too much could hurt my chance of a strong return in coming decades, even if the business does well.
So for now I will wait and see whether the price falls in coming months to a more attractive level for me to buy.
