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Why I think this visionary company could one day make the FTSE 100

If you’d asked me three years ago whether fantasy miniatures producer Games Workshop Group  (LSE: GAW) would make a decent investment, I’d have been sceptical.

After all, when I think of fast-growing international businesses with rock-solid trading niches, my mind would not normally settle on what looked at the time like a slow-growing producer, based in Nottingham, of models for hobbyists.

An explosion of revenue and profits

But the Games Workshop share price has blown my scepticism out of the water by rising more than 850% since the summer of 2016. And it’s all been driven by an explosion in revenue and earnings over the past couple of years or so.

Today’s full-year results report reveals to us that the rate of growth has eased back a bit, but it also demonstrates that the firm has a solid grip on its strategy. On top of that, I reckon the company’s product is hard for competitors to replicate, and throwing money alone at the challenge in order to compete with Games Workshop probably won’t work.

The core of the business is supplying fantasy miniatures that hobbyists collect, paint and ‘play’ with. But over decades, the company has developed an entire fantasy universe, and when customers buy into the firm’s Warhammer brand, for example, they are immersing themselves in escaping to that alternative existence.

A robust trading niche

Such attractions take time to develop. And it’s also a question of Games Workshop and its brands earning the trust of customers. Other companies probably can’t start from scratch and gain those advantages over a short time frame. So I reckon the company has a strong trading niche and an economic advantage in the market.

I find today’s numbers to be encouraging. Constant currency revenue for the trading year to June 2 rose just over 15% compared to the previous year, cash from operations moved nearly 8% higher, and earnings per share elevated by a little over 10%. That’s well-balanced growth in my view, which has become a feature of the firm’s financial reports.

Growth potential abroad

It’s well worth reading the company’s strategic report in today’s communication, which sets out the multi-channel approach to marketing and growing the business that is proving to be so successful. Looking forward, the directors think there are “great opportunities for growth, particularly in North America, Germany and Asia.”

My guess is that Games Workshop is on course to fulfil that growth potential abroad, which could end up elevating the company into the ranks of the FTSE 100 over time. Meanwhile, the directors increased the total dividend for the year by 23%. And at the current share price close to 4,790p, the forward-looking earnings multiple runs near 23 for the year to June 2020 with the anticipated dividend yield around 3%.

That’s a growth rating for sure compared to City analysts’ predictions of mid-to-high single-digit percentage increases in earnings ahead. But the quality metrics are stunning with the return on capital running near 75% and the operating margin above 30%. For me, the stock is attractive.

Proven Pedigree

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.