Games Workshop Group (GAW)
Games Workshop and the risk from within
I hope there will always be a place for Games Workshop in the Share Sleuth portfolio. The company epitomises niche businesses run for the long-term.
It manufactures and retails model soldiers and accessories for Warhammer, a fantasy tabletop wargame, and two derivatives, Warhammer 40,000, set in the future, and The Hobbit, a sideline which borrows characters and scenarios from the famous book and films.
The attraction is, Games Workshop (GAW) is the market. Although gamers substitute miniatures from other games, there are no competing manufacturers of Warhammer figures because Games Workshop invented Warhammer and defends its intellectual property. The figures are so detailed, it’s not easy to manufacture them, which means, the company claims, nobody else could do it better, or more cheaply, at scale.
More puzzling, perhaps, is the lack of competition for Warhammer itself. Over the last thirty years Games Workshop has grown into a highly profitable business befitting its monopoly status, turning over £135m in the year to June 2, 3% more than the year before. Profits were up 8%.
Normally success on this scale would invite competition but to play a tabletop wargame and enter competitions, you need other people to play it with. Warhammer is an alternate universe, and it helps if lots of other people inhabit it. Once a player and collector has invested the time and money in the models, the lore, and the rules, he is captivated. Games Workshop is exploiting the network effect, whereby the bigger the network the better it is, and the more hopeless the task of a competitor attempting to establish a rival. Competitors, like Warmachine and Kings of War, are small, and likely to remain so.
Games Workshop’s annual reports are introverted. They barely mention competition, because there isn’t much, or the economy, because customers collect their way through recessions. The main risks come from within.
In the middle of the last decade the company expanded recklessly after impressive sales of the Lord of the Rings game marketed heavily at the same time as the blockbuster films. But fans of the film did not necessarily become fans of the game they had bought. Although Games Workshop has games based on The Hobbit and we're midway through a series of film releases, this time there are no mass-media advertising campaigns. Gamers who walk through its hobby store doors are offered three worlds to play in, and one of them is an adaptation of Tolkein's.
The company accepts Warhammer and its derivatives are not a mass-market product, so it seeks out new hobbyists more gradually, opening retail hobby stores incrementally, training new hobbyists in gameplay and modelling, and carefully maintaining profitability at a level that satisfies shareholders without outraging many of its customers.
Shareholders are another internal risk. The popularity of the shares has grown as the company has re-established its reputation, and paid a series of generous dividends. But Games Workshop’s policy is only to pay out “truly surplus cash”. Idiosyncratic chairman and acting chief executive Tom Kirby has a warning for some of his newer institutional shareholders in the annual report; the long-term interest of the company and its owners comes before the short term interests of income seekers:
We have also had a shift in the balance of our owners. For three entirely different reasons each of our largest holders has done some selling. This has allowed those who have wanted to own us for a while the opportunity to buy. The fact that we have been paying a lot of surplus cash out as dividends hasn’t put them off! We’ll see what happens when we have a bad year and stop.
The price of a basic Warhammer kit, comprising a rule book and a couple of dozen figurines is about £60. Paint, pliers, glue, and other modelling equipment costs about £40. It’s not cheap, until you start comparing it to other hobbies.
As both the father of a customer, my son just bought Warhammer with his birthday money, and as an investor, I am more concerned about the price of the shares. They trade on an earnings yield of about 6%, which, given the qualities of the company, is not outrageously expensive. It’s not obviously cheap though, so I’m not adding or reducing the Share Sleuth portfolio's holding established nearly four years ago.
About the author
Richard is companies editor of Interactive Investor and a columnist at Money Observer magazine. A keen private investor through his Self Invested Personal Pension, he manages two virtual portfolios. The Share Sleuth portfolio is a hand-picked collection of mostly small-cap value shares, while the Nifty Thrifty is a mechanical portfolio designed to pick large, successful companies at cheap prices.
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