Fantasy figure maker and FTSE 250 member Games Workshop (LSE: GAW) has developed a huge following among both professional and retail investors over the last few years, and with good reason. Had you the skill or luck to invest £5,000 back in 2016, your holding would now be worth roughly £90,000! It’s another great example of how buying stock in a fast-growing, quality UK company can dramatically enhance your wealth.
With the shares hitting a fresh record high this morning following the release of its latest set of full-year results, is now a good time for new investors to get involved? Yes and no.
Record results
When the CEO of a company includes the words, “Wow, what a year!” in his report, you get an inkling of just how positive trading has been.
Despite the coronavirus forcing it to close for business on 24 March, Games still managed to grow sales by 5.1% to 269.7m in the year to the end of May. At £89.4m, pre-tax profit was 10% higher. This was, in short, the best year of trading in the company’s history.
This is not to say that the Games hasn’t been forced to adapt. In response to the pandemic, it took advantage of the government’s furlough scheme, which the Nottingham-based business is now in the process of repaying. To further mitigate the impact of the virus, Games has also paused shop openings “for the foreseeable future” to concentrate on supporting existing stores back to health.
Having said this, the company did say that it would continue to invest in its IT systems, warehouses and online offering. Sales from the latter “continue to go from strength to strength“, according to management.
Quality UK stock
In a market stuffed with companies that overpromise and underperform, Games Workshop is the stuff investors dream of. It boasts stonkingly high margins and a very strong financial position. It’s a clear leader in a niche market and has an exceptionally loyal following.
Importantly, the company also generates superb returns on capital. In other words, it makes great money on what it invests in itself. As Warren Buffett, Terry Smith and Nick Train have all said, this is one of the best ways of identifying businesses that could potentially change your life.
There’s just one problem: the price you must pay to acquire firms with these characteristics is usually high. Games is no exception.
Punchy valuation
A forecast price-to-earnings (P/E) ratio of 47 for the new (current) year is undeniably punchy. This is also before taking into account the near-10% rise in the share price in early trading this morning.
To be willing to pay such a price you need to be very confident that the company will continue to grow at a very fast rate. Although I’m bullish on the potential for it to exploit its intellectual property in a number of ways (video games, films) and grow the Warhammer brand in markets such as China and North America, it does feel like quite a bit of this is already priced in.
Factor in concerns surrounding the possibility of a second coronavirus wave and the ongoing saga that is Brexit and I’d be wary of going ‘all-in’ on this top UK stock right now.
Should markets crash again like they did in March, however, I’ll be backing the truck up.
