It’s not often that a stock drops after reporting forecast-beating trading numbers. But Games Workshop (LSE:GAW) — in my opinion the FTSE 100 greatest growth share — has done just that.
At £183.70 per share, the tabletop gaming giant’s fallen 3% on Tuesday (13 January). Over the last month it’s now down roughly 6%, though revenues and profits keep beating expectations and cash flows continue to boom.
So what’s going on with Games Workshop’s share price? And does recent weakness represent a handy dip-buying opportunity?
Strong results
Not everyone is familiar with the FTSE company’s operations, so let me provide a one-line introduction. Games Workshop is the global leader in fantasy tabletop gaming — it designs, manufactures and sells games systems, miniatures, paints and accessories that hobbyists eagerly snap up.
Its share price leapt to fresh highs in December when it predicted core revenue of at least £310m, and minimum licensing revenue of £16m, for the six months to November. It also tipped pre-tax profit of at least £135m.
Today the Warhammer maker surpassed expectations again. It announced core revenue of £316m, up 17% year on year, and an 88% drop in licensing revenue to £16m. Licensing sales benefitted the year before from the blockbuster release of its Space Marine II video game.
Still, an 11% rise in headline sales to £332.1m drove profit before tax to £140.8m. This was also up 11% year on year.
To top things off, net cash leapt to £112.5m from £79.1m a year earlier. Reflecting its strong performance, the business announced a 110p per share dividend, its sixth of the year.
Valuation issue
Games Workshop isn’t immune to broader weakness in consumer spending. But as today’s results show, its position as undisputed market leader in a niche industry provides it with stunning resilience.
So why has the stock dropped despite Tuesday’s results? They were great, sure, but they weren’t perfect, with tariff-related costs coming in at £6m over the half year.
Expenses like this remain a threat given current US trade policy, and the fact Games Workshop manufactures all its product here in the UK.
The trouble is that Games Worksop shares look expensive on paper, even after recent weakness. Its forward-looking price-to-earnings (P/E) ratio is 34 times. At these levels, trading numbers tend to need to blow the doors off.
While undoubtedly excellent, the market clearly thinks the FTSE firm hasn’t done quite enough to justify that valuation today. Its stunning share price rise around the end of last year has also seen investors pause for thought.
Is Games Workshop a Buy?
On balance, then, are Games Workshop shares a Buy for me right now? My personal view is yes — I actually topped up my holdings in the company last week.
While it’s pricey on paper, I think the FTSE 100 stock is fully worthy of a premium valuation and is one to consider. It remains in pole position to capitalise on the booming fantasy gaming market. And plans to step up licensing of its red-hot Warhammer IP with the likes of Amazon could unleash an exciting new growth phase.
