FTSE 250 company Games Workshop (LSE:GAW) is a stock that could be going places.
The business designs and makes miniature figures and wargames. And it created the Warhammer brand, which is known to be the word’s most popular table top battle game.
Sales come from multiple channels, such as the internet, company stores and via independent retailers.
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And the business has millions of customers across the world. But if I’d stumbled across the company 10 years ago, I never would have predicted its success. It would have been hard for me to imagine that such a seemingly niche product could appeal to so many.
A company with vision
But Games Workshop has visionary directors who are very much in control of their strategy. And there’s much more to the business than merely producing miniatures.
Customers are immersing themselves in an entire fictional world that has been built, nurtured and developed over many years. And my guess is the whole setup is probably addictive.
Competitors can only watch with envy. It takes time and patience to build customer trust and loyalty like Games Workshop has. And deep pockets probably wouldn’t help much. Companies can’t easily take market share from Games Workshop by simply throwing money at the challenge.
And I reckon that business model is key to the enduring competitive advantage that the business enjoys. The company’s quality indicators are stunning. And the financial record shows persistent growth across most of the important measures, such as revenue, earnings, cash flow and shareholder dividends.
Meanwhile, progress from the share price has been impressive over the past seven years or so. Already, Games Workshop has delivered its shareholders multi-bagging returns.
But there are good reasons to believe the stock has more left in the tank – perhaps much more.
For a start, there’s big potential for growth abroad. But on top of that, Games Workshop announced in December 2022 that it had reached an agreement in principle with Amazon.com.
A potentially exciting deal
The deal will see Amazon.com develop Games Workshop’s intellectual property into film and television productions. And Games Workshop will grant Amazon associated merchandising rights.
This could be huge.
And In advance of contracts being entered into, Amazon commenced “certain development activities”, such as holding preliminary discussions with writers. So it looks like Amazon is serious about the project.
The initial focus will be on the Warhammer 40,000 universe. And Games Workshop will grant rights for Amazon to develop it.
However, the project remains dependent on and subject to agreement and signing of contracts. So there is some risk that the deal may fall through.
And if that happens, I think it’s likely the Games Workshop share price will fall to reduce the valuation multiple, after all, it rose a fair bit when this deal was announced. And another long-term risk is that the firm’s products may go out of fashion at some point.
Meanwhile, with the share price near 10,808p, the forward-looking earnings multiple is just below 26 for the trading year to May 2024. And that valuation looks quite full.
However, the anticipated dividend yield is almost 3.8%. And I recently decided that level of income is sufficient compensation for me to take the risk of owning a few of the shares to see what happens in the long term.
