The Games Workshop (LSE: GAW) share price is having a wonderful few years, but has dropped 7% since June’s all time high. I would argue that based on soaring earnings and a reliable dividend, that’s too great a discount.
In early August CEO, Kevin Rountree and Finance Director Rachel Tongue won bonus share awards for recent performance. Top brass at the Nottingham HQ are clearly pleased with the way business is going, but is the stock overvalued or is now a true entry point for value investors?
Buy in time?
City analysts suggest a forward P/E ratio of around 22, meaning investors will pay 22 times future earnings for £1 of profit. If that seems rather high, you may consider that 2019 results for the year ending 2 June beat expectations once again, with pre-tax profits rocketing 9.4% to £81.2m and a sales hike of 15.9%.
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The group carries very little debt and has not added any in the last five years. That takes pressure off the FTSE 250 firm’s profit margins and says to me a higher P/E ratio is justified.
Earnings per share jumped from 184.3p in 2018 to 202.9p in 2019 and the full-year dividend was up by almost 25%.
An upcoming ex-dividend date of 8 August gives the canny investor two days to jump in and reap 30p per share (as long as you buy before the ex-dividend date, you can sell it on at any point after that date and still get the dividend).
Marching orders
Sometimes in all the talk of ratios and profit modelling we forget to look at what a business actually makes. Games Workshop’s main product line, Warhammer, is without peer.
When you’ve graduated from Dungeons & Dragons and want to take it a step further, you start building armies. And I believe Games Workshop’s generals have the foresight to take the company further.
Greater expansion across Europe is on the cards, with the group hiring development managers for France, Germany and the Czech Republic. Overseas growth will add some exposure to the euro and so may drive up costs, but I still rate this stock.
Strong Character
If GAW’s P/E ratio makes you hesitant, toymaker Character Group (LSE:CCT) may be one for your watch list. The rights owner for wildly popular children’s brands Peppa Pig and Ben & Holly had a dividend yield of 4.4% last year, inclining up towards 5% next year, and it reported rising revenues in H1.
Operating profits were up £1.3m to £5.9m and pre-tax profits hit £5.6m against £4.5m a year earlier.
As any exasperated parent could tell you, being forced by kids to rewatch the same programme over and over again is a pain. But it clearly adds to the company’s bottom line. And wider rights ownership of trending toys and games like Pokemon and Treasure X are a boon to investors.
Currently trading at a P/E of 8.8 with earnings expected to fall by around 3% next year before recovering in 2020, one other thing to consider is the company’s fortunes in North America. Directors said sales there “continue to be challenging” after the collapse of Toys R Us in 2018.
But I still think it is undervalued, considering expected revenue growth of 7.6% means it would outpace the wider market.
The £119m market cap AIM-listed stock has declining debt levels while cash reserves are heading up. That looks like good management to me.
