Following an alternately energising and chilling conversation with investors, I’ve updated my two minute monologue on Games Workshop. The conclusion is the same though.

Creator / Landlord / Distributor / Broker

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

Bargain / Turnaround / Cyclical / Stalwart / Growth

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.
The company inflicted crisis on itself in the middle of the last decade, expanding aggressively in response to demand for the Lord of the Rings games, which are produced under license. Many of the gamers it recruited then were inspired by the films released at the same time, but subsequently lost interest. Profitability recovered as the company refocused on its original Warhammer games.

Expectations

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 and centres in which to play, model and learn. By nurturing committed gamers, and making incremental improvements to its business like the new one man store format, it's growing by word of mouth (and Facebook).

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 in December.

Threats

competitive position – weak / neutral / strong
Rival role playing games put the player in the shoes of an individual not a whole army while Warhammer's scale puts it in a niche of its own, with whole battlefields to be constructed and painted. Games Workshop strong competitive position stems from the fact that it owns it, having created Warhammer. It designs and manufactures the miniatures, makes the rules, and the paints, owns the hobby centres, and publishes the magazines that promote the hobby.

Some gamers champion alternatives. Warmachine involves smaller battles and Kings of War miniatures are cheaper and can be used interchangeably with more generic Games Workshop figures but these tiny companies currently pose little threat. Hobbyists and bootleggers might rip their own miniatures using 3D printers if the technology becomes cheap enough, a development some fear might undermine Games Workshop’s business.

Video games, often mooted as competition for gamers’ attention, have become on opportunity. Games Workshop earns significant royalties from Space Marine, a video game based on Warhammer 40,000 and produced under license by THQ.

finances – weak / neutral / strong
The company has no debt but substantial lease commitments. After capitalising those leases, implied debt is approximately 50% of tangible assets. Free cash flows currently exceed reported profit allowing the company to pay very generous dividends.

management – weak / neutral / strong
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. The directors own 7% of the company and prefer to focus on the business than City analysts, which is a good omen for long-term shareholders.

valuation – cheap / neutral / expensive
The big weakness in the investment case is the share price, which has risen steadily over the last four years. At around 680p Games Workshop’s unlevered earnings yield is only 6%. Averaging adjusted after-tax operating profit over the last seven years produces an even more expensive valuation, but that includes two very poor years that are unlikely to be repeated. More likely the company will grow, but to invest on that premise is inherently speculative.

• About the Thrifty 30
• Two minute monologues explained
• More posts on Games Workshop
• Games Workshop annual reports
• Games Workshop worksheet