Shares for the future: a high-quality firm like no other

Once again I am staring at Games Workshop Group (LSE:GAW)’s numbers and shaking my head. Among the quality companies I follow, there is nothing quite like them.

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Scoring Games Workshop: an industry in a company

The Past (dependable) [3]

• Profitable growth: 21% revenue, 34% profit CAGRs [1]
• Strong finances: Net cash [1]
• Through thick and thin: Lowest RoC 37% (2016) [1]

The table calculates averages and growth rates for the last eight years, which takes us back to 2016. That was Kevin Rountree’s first full year as chief executive.

It was also the year profit margin, return on capital and revenue growth, all started to lift off.

Before 2016, Games Workshop was a decent business, but it was not growing convincingly. Subsequently, revenue has grown at a compound annual growth rate (CAGR) of 21% and adjusted profit has grown at 34% CAGR.

In the year to June 2024, Games Workshop achieved double-digit growth again, while earning higher than average return on capital.

This was no surprise, in fact it might have been a slight disappointment.

Games Workshop launched the latest edition of its most popular tabletop wargame, Warhammer 40,000, at the beginning of the financial year. Historically, these releases drive increased sales of model soldiers.

Recent editions of Warhammer 40,000 have been launched at three-year intervals. The previous two launches in the financial years of 2018 and 2021 not only propelled Games Workshop to peak profitability (62% and 78% Return on Capital respectively), they also drove peak revenue growth (40% and 37%).

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2024 looked a lot like those earlier Warhammer 40,000 launch years in terms of Return on Capital (74%), but revenue growth was a more modest 12%.

The company says it will be a fair challenge to grow in 2025, following the best Warhammer 40,000 launch on record, but that is the plan.

I am not alarmed by sub-par growth in 2024 and cautious words about growth in 2025. Games Workshop grew 12% in 2022, after the launch of the last edition of Warhammer 40,000, and 16% in 2019, after the launch of the one before that. 

Companies, even Games Workshop, have better years and worse years and a period of more modest growth, if that is what we are facing, would not make it a bad long-term investment.

The company’s impeccable numbers extend to the balance sheet and cash flow statements. In a typical year, Games Workshop converts more than 90% of profit to cash, and for the past five years the year end cash balance has exceeded the value of all Games Workshop’s financial obligations.

The Present (distinctive) [3]

• Discernable business: Owner and maker of Warhammer [1]
• With experienced people: Chief executive since 2015 is a lifer [1]
• That creates value for customers: Multi-faceted life-long hobby [1]

Games Workshop makes and sells science fiction and fantasy-themed miniatures based on the Warhammer 40,000 and Warhammer Age of Sigmar fictional universes.

The miniatures are painted by hobbyists. They often use them in tabletop wargames played in accordance with rulebooks created and updated by Games Workshop.

Although it is a niche hobby, it is a sizeable niche. Games Workshop’s three factories in Nottingham churned out 40 million plastic sprues in 2024 (sprues are the plastic frames holding model components). The company earned over £500 million, mostly in the US and Europe.

The hobby has long-term appeal. Warhammer 40,000 is a science fiction themed universe originally launched as a game in the late 1980s, and now in its 10th edition. Its sibling, Warhammer Age of Sigmar replaced the original Warhammer Fantasy Battle game, which dates back to the early 1980s.

Although Games Workshop stopped producing Warhammer Fantasy Battle in 2015 when it introduced Warhammer Age of Sigmar, it pleased old-school gamers in 2024 by rebooting the original as Warhammer: The Old World.

This intellectual property extends beyond game editions to hundreds of novels, more than 500 editions of the Warhammermagazine White Dwarf, and daily video content published on Games Workshop’s Warhammer Community website and YouTube. These activities promote the hobby, which is also showcased on the Warhammer e-commerce site, in more than 500 company-run hobby stores and thousands of independent hobby stores.

In 2021, Games Workshop launched Warhammer+, a monthly subscription that grew 30% to 176,000 subscribers in 2024. Subscribers receive a free and exclusive miniature every year, the opportunity to buy another, and original video content.

In addition to this “core” revenue Games Workshop also has a healthy sideline licensing Warhammer stories and characters to companies that make video games. This activity earned it 6% of revenue, and because of the low costs associated, 13% of profit in 2024.

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There are few unique businesses listed in London, but I think Games Workshop is one of them. It has unique intellectual property, which it defends vigorously, and that means there is no direct competition.

Other companies make tabletop wargaming miniatures based on historical or imaginary worlds but they are tiny in comparison.

Games Workshop benefits from economies of scale: its massive design, manufacturing, publishing, distribution and retail capabilities. It also benefits from network effects. The more people that play the games and upload content to social media, the easier it is for people new to the hobby to join in.

Two men have dominated the company's history. Tom Kirby joined as general manager in 1986, led it through a management buyout in 1991, and floated it in 1994. An executive director until 2014, he retired as non-executive chair in 2017.

Kevin Rountree joined in 1998 as assistant group accountant, and became chief executive in 2015.

Chief financial officer Rachel Tongue is standing down. Her replacement is Liz Harrison, who joined Games Workshop as a finance manager in 2000.

The Future (directed) [3]

• Addressing challenges:Has internalised most challenges [1]
• With coherent actions: Focuses on what it controls [1]
• That reward all stakeholders fairly: Long-term ethos, employee focused [1]

Games Workshop has internalised risk by inventing an industry and developing the capabilities to deliver almost all of it itself.

The company is highly integrated. It manufactures its own plastic and resin models. It controls distribution (not always to its own satisfaction) through three main hubs in Nottingham, Memphis and Sydney, although a hub in Asia is outsourced. It operates its own book publishing imprint, Black Library, and publishes its own magazine. It operates 550 stores and sells online through its own site.

The main risk, as the company says every year, is mismanagement. Outgoing chair John Brewis says: “if it was easy, everybody would be doing it”.

Games Workshop’s approach is to focus on the many things in its control, and ride out the things that are not.

One of the current focuses, and risks, is IT. The company’s creaking systems have disrupted orders and fulfilment, and a project to upgrade them is taking longer than expected. The company has increased IT spend from 3% to 5% of core revenue and anticipates that it will be three to five years before the work is done.

Games Workshop can be so internally focused partly because Warhammer is such an important part of so many people’s lives that their spending is quite resilient. Mostly though it is because it has a winning formula and will not be distracted from following it.

It has not always been that way. I think under Tom Kirby, we saw what could go wrong. More than two decades ago the company was granted the licence to make Lord of the Rings miniatures and games by the film company that made the famous Lord of the Rings trilogy.

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The popularity of the films drove demand for the miniatures and expansion at Games Workshop, but it also deflected management’s attention from its own intellectual property and once the films were mostly memories, the company was left with three underperforming ranges.

A prolonged period of cost cutting and restructuring followed, much of it necessary, but the Games Workshop’s creativity was channelled into making more and more expensive models.

They were highly profitable but appealed to a small subset of the community. The pendulum had swung. Having expanded aggressively with intellectual property it did not control, Games Workshop became very cautious with the intellectual property it did control. This alienated many of its customers.

One of Kevin Rountree’s first acts as chief executive was the introduction of starter kits, models and paints at relatively low price points. Game rules were refreshed and published for free, and Games Workshop re-engaged with its community online.

The company has also become more open and pro-activity about sharing its intellectual property.

Licensing revenue still mostly comes from video game partnerships, but that could change if Games Workshop agrees creative guidelines currently under discussion with Amazon Studios, the film and TV production arm of Amazon.com Inc (NASDAQ:AMZN).

Up for grabs are the exclusive rights to produce films and television series set in the Warhammer 40,000 universe, and the option for equivalent rights to the Warhammer Fantasy universe. We will know whether Amazon gets them in December.

The price (discounted?) [-1.1]

• No. A share price of £102.90 values the enterprise at about £3.3 billion, 28 times normalised profit.

A score of 7.9 implies Games Workshop is a good long-term investment.

It is ranked 8 out of 40 shares in my Decision Engine.

18 Shares for the future

Here is the ranked list of Decision Engine shares. I review the scores once a year, soon after each company has published its annual report.

Generally, I consider shares that score 7 or more out of 10 to be good value. Shares that score 5 or 6 out of 10 are probably fairly priced.

Cohort (LSE:CHRT), Goodwin (LSE:GDWN), Cropper (James) (LSE:CRPR) and Jet2 Ordinary Shares (LSE:JET2) have all published annual reports and are due to be re-scored.

Scores and stats: Richard Beddard. Data: SharePad and annual reports
Shares marked with a question mark are more speculative
Click on a share's name to see a breakdown of the score (scores may have changed due to movements in share price)
Shares marked with an asterisk (*) have been re-scored, click the asterisk to find out why.

Richard Beddard is a freelance contributor and not a direct employee of interactive investor.  

Richard owns Games Workshop and many shares in the Decision Engine. He weights his portfolio so it owns bigger holdings in the higher-scoring shares.

See our guide to the Decision Engine and the Share Sleuth Portfolio for more information.

Contact Richard Beddard by email: richard@beddard.net or on Twitter: @RichardBeddard