But is it the company it was?

It feels like old times. Hornby, model railway company and owner of brands beloved of UK model makers and toy collectors, is back on my watch list after ten years as stock market darling.

I remember Hornby’s tremendous run a decade or so or ago. People thought it deserved a rating like fantasy war game behemoth Games Workshop‘s and it went on to achieve that as Games Workshop was, ironically, crashing.

The argument was that model railways aren’t like ordinary toys that go in and out of fashion. They’re enduring hobbies that people love. The continued inclusion of Games Workshop in the Thrifty 30 despite its relatively high share prices shows I agree hobbies can make good investments.

But I’m a little more sceptical about trains. Maybe they’re an old man’s game and I wonder if the next generation of old men, my generation, is really as interested in trains as earlier ones, generations that can recall the age of steam.

A recent trading update casts doubt on Hornby’s resilience. The company blamed the economy for slowing sales growth, and profits likely to disappoint in the year to the end of March. In response it’s making less detailed models it can sell for lower prices.

I’m a little uneasy about the importance of licensing to Hornby. To increase the relevance of its products to new customers Hornby buys licenses to create Toy Story, Star Wars, and Olympic themed products. It made a Hogwarts Express, though I can’t find it on the Hornby site any more. You can race TIE Fighters against X-Wings (i.e. spacecraft) on your Scalextric track with the objective of derailing each other, a bizarre prospect but it’s probably fun.

Licensing got Games Workshop into trouble as it expanded recklessly on the ephemeral popularity of its Lord of the Rings game.

Games Workshop’s recovery has been led by renewed focus on its own intellectual property, the Warhammer and Warhammer 40,000 games, driven mostly by the enthusiasm of modellers and players.

I find it comforting that Games Workshop is confident enough in Warhammer not to repackage it every time a likely blockbuster film comes along, and so I’m slightly wary of Hornby.

Because of the licensing, the fact that Hornby is also a distributor (and encroaching on Games Workshop’s territory in a new deal to distribute upstart Mantic‘s Kings of War game and miniatures), and its diversification, Hornby makes toys (Scalextric), models (Airfix), and collectibles (Corgi), Hornby offends my preference for simplicity.

It’s bringing Breyer Horses to the UK Market, as well as Olly the White Van playsets, die-cast and remote control vehicles, and jig-saws, and it has a global licence to commission and distribute Moshi Monsters pin badges and vehicles.

Are these toys, or hobbies? Sometimes I can’t tell.

Profitability has declined sharply in recent years, and I’m wondering if Hornby has diworseified, spent money on companies and licenses, including European model railway companies, that don’t subsequent earn high enough returns to justify the price.

That and its apparent sensitivity to the sluggish economy mean it may not the be the stalwart I hoped, but more likely a cyclical, or even a potential turnaround. I’d invest in all those situations, but only at the right price.

On the other hand, recent annual reports have blamed supply problems for falling sales. Hornby uses Chinese manufacturers and since it’s now diversified suppliers and improved their performance, perhaps this is an opportunity to by a solid British company at a good price.

Despite my caution, average return on equity according to Sharelockholmes over the last decade was 18% (declining to 9% last year), which makes the shares look very cheap on a price to book value of 1.1.

Those brands are famous. I should take a closer look.