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It’s not uncommon for a stock to drop after reporting better-than-forecast trading numbers. But Games Workshop (LSE:GAW) – in my opinion i FTSE 100 A huge share of growth – you’ve done just that.
At £183.70 per share, the tabletop games giant fell 3% on Tuesday (13 January). In the past month it is now down nearly 6%, although revenue and profit continue to exceed expectations and cash flow continues to improve.
So what happened to Games Workshop’s pricing? And does the recent weakness represent a useful opportunity to buy the dip?
Powerful results
Not everyone is familiar with the workings of an FTSE company, so let me give a one-line introduction. Games Workshop is a world leader in high-quality tabletop gaming — designing, manufacturing and selling game systems, miniatures, paints and accessories that hobbyists eagerly pick up.
Its share price hit a new high in December when it forecast core revenue of at least £310m, and a minimum of £16m in license revenue, in the six months to November. It also reported a pre-tax profit of at least £135m.
Today i Warhammer The manufacturer exceeded expectations again. It announced revenues of £316m, up 17% year-on-year, and an 88% fall in licensing income to £16m. Licensing sales have benefited over the past year since its blockbuster release Space Marine II video game.
However, an 11% increase in headline sales to £332.1m drove pre-tax profit to £140.8m. This is also up 11% year on year.
To top things off, net income jumped to £112.5m from £79.1m last year. Reflecting its strong performance, the business declared a dividend of 110p per share, its sixth for the year.
The measurement problem
Games Workshop is not immune to the many weaknesses of consumer spending. But as today’s results show, its position as the undisputed market leader in a niche industry gives it incredible resilience.
So why did the stock fall despite Tuesday’s results? They were good, to be sure, but not perfect, with tax-related costs of up to £6m during the year.
Costs like this remain a threat given current US trade policy, and the fact that Games Workshop manufactures all of its products here in the UK.
The problem is that Games Worksop shares look expensive on paper, even after recent weakness. Its forward price-to-earnings (P/E) ratio is 34 times. At these levels, trading numbers often need to close doors.
While it is undoubtedly very good, the market clearly thinks that the FTSE company has not done enough to justify that valuation today. A dramatic rise in its share price late last year has also seen investors pause for thought.
Is Games Workshop Buying?
On balance, does Games Workshop share Buy Me Now? My personal opinion is yes – I actually added my money to the company last week.
Although they are expensive on paper, I think the FTSE 100 stock is fully deserving of the premium valuation and should be considered. It remains well positioned to capitalize on the booming fantasy gaming market. And plans to increase its red-hot approval Warhammer IP with the likes of Amazon it can usher in an exciting new growth phase.
