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Why I Would Buy Games Workshop Group PLC And Moss Bros Group plc But Sell Rio Tinto plc

Today I am running the rule over three London-listed headline grabbers.

Games Workshop Group

Goblin emporium Games Workshop (LSE: GAW) is one of the leading chargers in Friday trade and was recently up 3.6% on the day. And with good reason, in my opinion, as the gamesmaker’s painful cost-cutting measures paves the way for solid earnings growth. The company’s products have a fierce following amongst fantasy lovers the world over, and with Games Workshop stepping up new product roll-outs I reckon the stage is set for revenues to gallop higher.

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This view is shared by the City, and analysts expect the business to follow an 8% earnings rise in the year concluding May 2015 with extra advances in the region of 6% and 5% in 2016 and 2017 respectively. Consequently Games Workshop changes hands on a P/E rating of 12.4 times for the forthcoming year — comfortably below the value threshold of 15 times — and which drops to 11.8 times in 2017.

But it is in the dividend stakes where the niche gamebuilder really sets itself apart, and Games Workshop’s terrific cash generation is expected to drive an estimated payment of 32p per share for fiscal 2015 to 35p in 2016, and again to 40p the following year. As a result the company boasts enormous yields of 6.9% and 7.8% for 2016 and 2017 respectively.

Moss Bros Group

Suiter-and-booter Moss Bros (LSE: MOSB) also boosted the market in end-of-week business following a positive trading update, and was last dealing 7.9% higher from Thursday’s close. The London business saw like-for-like sales leap 7.4% during the first 15 weeks of 2015, driven in no small part by a near-65% advance in online sales.

The business’ ongoing redevelopment of its websites is helping to drive internet traffic skywards — online business now accounts for 10% of all sales, up from 6.5% at the same point last year — while the Moss Bros’ store refitting programme is also paying off handsomely. Against this bubbly backcloth the retailer is anticipated to record decent earnings growth of 7% and 16% in the years concluding January 2016 and 2017 correspondingly.

Moss Bros may not be the most attractive growth pick in town on a pure value basis, with these figures producing elevated P/E ratios of 22 times for this year and 18.9 times for 2017. However, in my opinion this is more that offset by the company’s generous dividend policy, with a projected payout of 5.4p per share for this year resulting in a 5.7% yield. And this edges to 5.9% for 2017 amid expectations of a 5.6p reward.

Rio Tinto

Like the rest of the mining sector, in my opinion Rio Tinto (LSE: RIO) (NYSE: RIO.US) is a perilous selection for those seeking reliable earnings and dividend growth in the years ahead. Oversupply continues to wash over many of the earth mover’s key markets, and prices in the critical iron ore market have slumped over the past week as more disappointing Chinese economic data has revived fears of collapsing demand.

These concerns were given further credence after UBS told Financial Review this week that it expects prices to slip all the way back to $50 per tonne again in the coming months before settling, just above the multi-year lows seen at the start of 2015. With Rio Tinto facing similar problems across other critical commodity sectors, the firm is expected to see earnings slip 45% this year, producing a P/E rating of 16.5 times.

I reckon that such a multiple does not fairly reflect the risks facing the business, and that City predictions of a 22% bottom line flip in 2016 are likely to prove way wide of the mark in spite of the savage cost-cutting and capex reductions across the business. And with the bottom line looking set to sag, I also believe that projected dividend hikes, to 234 US cents in 2015 and 245 cents in 2016 — forecasts that carry tempting yields of 5.1% and 5.4% respectively — could fail to materialise.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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