By investing in product quality and intellectual property, Games Workshop has built a wide moat
London-listed Games Workshop Group is a leading international specialist designer, manufacturer, and multi-channel retailer of miniatures, scenery, artwork and fiction for tabletop miniature games. The company is the largest and the most successful hobby miniatures company in the world, with its major brands being Warhammer and Warhammer 40,000. In addition, Games Workshop holds a licence for The Lord of the Rings/The Hobbit tabletop battle game. Games Workshop is a vertically integrated business and retains control over every aspect of the design, manufacture and distribution of its models and rulebooks, where products are sold through its chain of over 500 retail stores globally. Games Workshop currently trades at GBP99.70 ($169.28) per share, giving it a market cap of GBP321 million.
We think Games Workshop Group is a highly profitable company in its niche. The products the company sells have high inelasticity as they cater to the hobbies of individuals in specific areas of interest. For example, collectors of miniatures are willing to pay a significant sum for quality products, such as the ones manufactured by the company. Also, the company has clearly stated its focus on long-term success instead of short-term gains. We think the efforts and progress made by the company so far have been highly successful as it focuses on the quality of its products, making the stock undervalued, particularly for longer-term investors. The more quality miniatures and products Games Workshop sells, the more customers it can attract and retain. This allows the company to not only maintain its competitive advantage but also to reinvest in making more and more exciting miniatures and games, which creates a virtuous, expanding circle. Also, the company has made it clear that it will only make fantasy miniatures, not historical ones. This allows it an unlimited scope for product innovation such as from the Warhammer and Warhammer 40,000 worlds fantasy miniatures.
Profitability is one of the key objectives of the company which makes it very cost-conscious. For example, Games Workshop does not have expensive offices, prime rent shopping locations or advertising for the mass market which can be very costly. Capital and money are mostly invested into improving its business model, such as tooling to make better plastic miniatures, opening more Games Workshop stores to improve customer service and fit-for-purpose systems to make the company’s processes more efficient and reliable. Furthermore, Games Workshop, through its continual investment in product quality and its intellectual property, has a considerable barrier to entry for potential competitors. The company’s moat is made stronger through Games Workshop stores showing customers how to collect, paint and play with its miniatures and games, which makes it more difficult for competitors to replicate this system. This provides the company with a better capacity to grow profitably in the future. The addressable market for the company is also vast as the rest of the world aside from the UK can be tapped into for future growth and sustainable margins.
Another case for Games Workshop is that it pays dividends, and at current prices, the annualised indicated dividend yield is a healthy 4.8%. It is also key to note that the company has historically performed well during challenging economic times and should continue to do so, as loyal customers are less likely to abandon their hobbies during these periods, further reinforcing the company’s moat.
Games Workshop’s financials have been excellent over the past 10 years, especially its operating cash flow and free cash flow, as shown in Chart 1. The growth in the company’s margins is also illustrated in Chart 2, where it has grown steadily over the years. In terms of financial safety, the company has ample liquidity with a cash ratio, quick ratio and current ratio of 1.9, 2.1 and 3.6 times respectively. Solvency should also not be a concern as the company is net cash. In terms of yields, the company’s earnings, operating cash flow, free cash flow and dividend yields are 4.3%, 6.3%, 6.0% and 4.8% respectively, which is more attractive than the riskfree rate of 4.1%, as illustrated in Chart 3.
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The company has four “buy” calls and no “hold” and “sell” calls, with an average target price of around 15% above its current trading price. Based on our in-house valuations, we believe that the intrinsic value of the company is at least 20% above its current trading price. Games Workshop Group is a suitable stock for investors seeking longterm growth with relatively limited investment risk.
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