Games Workshop shares just blew up! Here’s why

Games Workshop shares have rocketed thanks to a very positive update on trading. With his own cash tied up in the stock, Paul Summers takes a closer look.

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Image source: Games Workshop plc

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As a holder of fantasy figurine maker Games Workshop (LSE: GAW) shares, I’m lapping up today’s (19 June) stellar rise. What’s got the market so excited?

Raking in the profit

The FTSE 250 member isn’t known for releasing the longest statements. However, today’s couple of paragraphs told me all I needed know.

Management estimates that core revenue for the 53 weeks to 2 June will come in at £490m, or above. So we’re looking at a rise of 10% on the previous year at the very least.

Licencing income — money generated from the use of the company’s brand by other businesses — is expected to be £30m. This is a 20% uplift.

The bottom line is also looking lovely. Pre-tax profit is expected to be “not less than £200m“. That’s a near-17% jump on the 2022/23 financial year.

Suddenly, that 7%+ rise in the share price (as I type) makes a lot of sense.

Quality stock

Of course, any update on trading only provides a snapshot of a company. For this reason, I always make a point of checking its fundamentals before making any investment decision.

On this front, there are very few FTSE stocks to rival the business, at least in my (admittedly biased) opinion.

Digging down into the numbers, Games continues to boast all the things I look for. These include a record of growing earnings year after year. Operating margins also average around 35% (far more than the vast majority of UK companies). Returns on capital — what the company gets out from the money it puts in — are staggeringly high.

I also love its conservative approach to managing money. The balance sheet is a work of art with lots of cash and very little debt (at least for a company valued at over £3bn).

On top of this, the firm arguably dominates a very small niche. It has a devoted following and a huge runway for growth if it’s able to continue capitalising on its coveted intellectual property.

With the company recently granting exclusive TV and film rights to its Warhammer 40,000 franchise to Amazon, I don’t think that will be an issue.

One happy owner

Based on all this, it’s no wonder the company has multi-bagged in value over the years. In fact, not throwing my money into Games Workshop shares roughly 10 years ago when I first ran the rule will probably go down as one of my biggest investing regrets.

Then again, every stock has a bear case. For me, an ongoing concern is anything that may impact on discretionary spending. Although looking increasingly unlikely, a further delay in interest rate cuts might be an example. I’m not exactly enthusiastic about the recent online spats between the company and some of its most devoted followers relating to the ‘gender flipping’ of characters either.

Overall however, I’m delighted by today’s update and the market’s reaction. In fact, I’m inclined to top up my position when cash next becomes available.

With inflation now falling to the Bank of England’s target of 2%, I wonder if we could see even more interest in the stock as we approach full-year results at the end of July.

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.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Paul Summers owns shares in Games Workshop Plc. The Motley Fool UK has recommended Amazon and 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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