A two minute monologue

What it does: model soldiers

Games Workshop designs, manufactures, wholesales and retails war gaming miniatures, scenarios, craft materials, books and magazines for its Warhammer, Warhammer 40,000 and Lord of the Rings games set in fantasy worlds.

Category: stalwart

Although profits collapsed twice in two decades, most recently in 2007 when the company made a loss, Games Workshop is capable of steady growth and high profitability, while distributing surplus cash to shareholders.

The recent crisis was self-inflicted as the company expanded aggressively incurring unwarranted costs. But it has recovered and in the last two years returned over 20% on equity in-line with the 10 year average. Recent half year results reported growth in sales, profits, and profitability for the war gaming business and a large royalty payment from THQ, which makes Space Marine, a video game set in the Warhammer 40,000 universe.  

More speculative aspects of the story include US expansion, more digital products, and more Lord of the Rings products to coincide with the release of The Hobbit film this year.

What needs to happen: cautious expansion

The company got into trouble using windfall profits from the Lord of the Rings game to open new hobby centres around the world, but many new customers were transient, attracted by the films. Now Games Workshop is expanding cautiously, focusing on increasing sales and profits in existing stores by giving customers what they want: a stream of novel miniatures at increasingly high levels of detail and intricacy and centres in which to play, model and learn. By nurturing committed gamers it's growing by word of mouth (and facebook).

What could go wrong:

competition
There isn't much. Rival role playing games put the player in the shoes of an individual not a whole army. Warhammer's scale means the modelling component is much greater, with battlefields to be constructed and painted.

Video games continue to be touted as competition. They are probably as much an opportunity as a threat although I'm watching Skylanders with interest and a little trepidation as an example of how miniatures and figurines and video might cross-over.

management
Tom Kirby, who masterminded Games Workshop's rise and fall, is still chairman although he has ceded the chief executive's chair to Mark Wells. Kirby is guardian of 'The Hobby' and his self-flagellation in the annual reports indicates he has learned from the mid-2000's. Wells also wears a hair shirt. Both men have big shareholdings and prefer to focus on the business than City analysts, which is a good omen for long-term shareholders.

company finances
The company has no debt and modest lease commitments. Shareholders' equity is 59% of total assets, including leases.

other: Lord of the Rings license
The six year license was extended in February last year and Games Workshop is uniquely able to produce and market the game, so I see little risk of the license being removed.

valuation
The share price is the biggest risk. At 515p, the ten year earnings yield is about 7.5%. There is a danger investors are paying too much for a modest return,  but I expect Games Workshop to grow, so it remains in the Thrifty 30.

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