The biggest faller in the FTSE 250 so far today (7 December) is the Games Workshop (LSE:GAW) share price. Despite being a strong growth stock over the past few years, it’s down 10.4% to trade at 9,945p. Here’s what’s going on.
Details of the update
The business released a trading update which was the first one since September. On the face of it, things are positive. The revenue forecast for the half-year is for it “to be not less than £235m”, up from the £212.3m from last year.
Importantly, profit before tax is estimated to be no less than £94m. This would be an increase from £83.6m.
However, there was a key point that seems to have underwhelmed investors. Licensing revenue is forecasted to fall from £14.3m to £12m. This revenue refers to situations when the intellectual property of the business is licenced out. For Games Workshop, this includes Warhammer video games.
The concern here is that if demand is slowing for supplementary products related to the brand, it could be an early warning sign. It’s something that will need to be monitored closely going forward.
Income outlook
Another point that might be contributing to the share price fall relates to free cash flow and dividends. The business usually pays out four dividends a year. Even though I expect that next one to be announced with the half-year results in January, I thought the management team would have provided an indication of the dividend size in this trading update.
The fact it didn’t mention it is potentially slightly worrying. It might be a smaller pay out, for reasons yet to be disclosed. At present, the dividend yield is 4.62%.
Another factor that goes along with available funds is the bump up in Christmas bonuses to staff. The cash payment is increasing from a total of £4.5m last year to £7.5m this year. It equates to £2,500 per staff member.
Of course, this should help to boost staff motivation. It’s not a big negative, but some investors might be concerned this lowers cash that could be used for dividends.
Nothing to worry about
I think the reaction in the share price today is overdone. Despite the concerns around licencing revenue and dividend potential, Games Workshop is doing very well.
It has a diversified revenue stream and is bucking the broader trend of retailers that sell to consumers having a poor 2023.
Given that the stock is up 43% over the past year and 253% over the past five years, I see the drop today as a short-term dip. Of course, with a price-to-earnings ratio of 25.87, it’s not cheap, even with the dip. Yet I think when investors consider the long-term growth prospects, the stock does look attractive.
