Image source: Games Workshop plc
Ask me for my favourite stock in the FTSE 100 that I don’t currently hold and my answer would be immediate: fantasy figurine maker Games Workshop (LSE: GAW).
In my opinion, this is about as good as any listed business gets. You’ve got a market leader with a fanatical following, powerful intellectual property and a bulletproof balance sheet.
For these reasons, I was interested to see the market’s negative reaction to the company’s latest set of full-year numbers. The share price was down 6% in early trading.
What’s going on?
Full-year results
To be clear, the Nottingham-based business is still doing very well. Total revenue came in at £659.7m over the 52 weeks to the end of May. This was a 17% increase on the £565m achieved over the previous year as the firm’s Warhammer 40K universe continued to find new fans. At £275.7m, pre-tax profit was almost 5% higher.
Notwithstanding this, the amount of money coming in from licensing deals was significantly lower. A total of £32.9m, although expected, was far less than the £52.5m of the previous year. Management also flagged US tariffs and higher plastic costs as headwinds. The total dividend of 485p per share was down on the 520p returned to investors in the previous financial year.
These things aside, I don’t think existing holders have much to worry about based on today’s results. Indeed, most companies would be happy to take these numbers, considering just how uncertain the economic climate is.
No, my main ‘issue’ with this magnificent FTSE 100 growth stock is actually very simple.
Not cheap
Prior to the opening bell, the forecast price-to-earnings (P/E) ratio for Games Workshop shares was 33. This is nowhere near some of the valuations slapped on AI-focused entities across the pond. But I fancy most ordinary investors would still consider this expensive. After all, the long-term average P/E for stocks in the FTSE 100 is roughly in the mid-teens.
Now, I could say this premium reflects the fact that it’s a far better business than most of those that make up the index. If you want quality — the £6.7bn cap’s operating margins are consistently around 30%–40% — you should expect to pay for it.
The problem is that expensive stocks carry with them higher expectations. So, it only takes a slight disappointment for some investors to jump ship. Of course, this can be exacerbated in the event of a general crisis in the market as a whole. For evidence of this, the share price pretty much halved between August 2021 and September 2022 as inflation raged.
Even if everything is executed perfectly, there comes a point when buyers become more reluctant to splurge. Perhaps tellingly, the FTSE 100 is now outperforming Games Workshop this year.
My verdict
All told, my view remains the same: I love the business, but I’d rather pick it up when it’s next thrown out with the bathwater. While we can’t be sure when this will occur or what will cause it, we can be fairly confident that a crash or correction will eventually come along.
That’s when I’ll back up the truck.
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Paul Summers has no position in any of the shares mentioned.
This story originally appeared on Motley Fool
