Cash ISAs can be an excellent tool for savers who are looking to shield their income from the tax man. However, as the best interest rate available for cash ISAs at the moment is less than 1.5%, it makes sense to look elsewhere for income.
Personally, my money is on high-quality growth stocks, companies that have a proven track record of creating value for investors, with a substantial competitive advantage and healthy profit margins. Games Workshop (LSE: GAW) ticks all of these boxes.
Outstanding track record
Games Workshop is an exceptional business. You might think that a company specialising in producing miniature figures for tabletop war games would have faded into obscurity over the past 10 years as computer games have taken over. But, thanks to its devoted fans, the group has not only managed to stay in business, but also grow at a rate many other retailers would kill to achieve.
Indeed, since 2013, revenue has grown at a compound annual rate of 10.3% as the company has rolled out new products. Thanks to a tight grip on costs and efficiency savings, profit margins since 2013 have more than doubled. As a result, net profit has grown at a compound annual rate of 29.6% since 2013.
This growth has translated into outstanding returns for investors. Over the past decade, shares in Games Workshop have returned just over 35% per annum, turning every £1,000 invested at the beginning of 2009 into £20,800 today.
Can the gains continue?
The question is, can the company continue on this trajectory? I think it’s highly probable. As noted above, the group has plenty of hardcore followers who provide a steady stream of income for the group. But at the same time, it’s also chasing new markets and management is always looking for ways to streamline the business.
Game Workshop’s figures for the six months to December 2 unveiled yet another record performance. Revenue jumped 14% year-on-year, and earnings per share increased 5%. Although these figures indicate growth is slowing, when taken in respect of the rest of the retail industry, it’s notable Games Workshop’s sales are still rising when many other retailers are struggling.
The increase in revenue is no doubt a result of growing customer numbers. According to today’s update, visitor numbers to its flagship Warhammer Community website increased 30% year-on-year to the beginning of December. Considering these figures, it’s no surprise that management is planning to upgrade its warehousing facilities in both Memphis and Nottingham near term, to help cope with growing demand and improve efficiency.
Time to buy
Put simply, I think Games Workshop looks highly attractive from an investment perspective.
The one problem I see with the stock at the moment is its valuation. The shares are trading at a forward P/E of 18.2, which is a bit more than I would like to pay for a retail business. That said, considering the group’s niche business, devoted customer base, and exceptional return on capital employed — a measure of profitability for every £1 invested in the business — of 87% for 2018, I think the shares do deserve a premium valuation.
As long as the company can continue to achieve double-digit sales growth (and I see no reason why it can’t) the stock should also continue to generate double-digit annual returns for shareholders for many years to come.
