Games Workshop is renowned for its production of miniature wargames, particularly the Warhammer series. The company is committed to creating the highest quality fantasy miniatures in the world, aiming to engage and inspire its customer base while achieving global sales and profitability. This straightforward business model, supported by a clear strategy, suggests a company that is easy to understand. However, the key question remains: does Games Workshop also represent a sound investment? This analysis seeks to explore that question in depth.
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since attending the workshop with Phil Town, I have decided to make some changes to the layout of my analyses. I will perform additional calculations and also provide a brief explanation of why the company is significant to me. If you want to learn more about my company evaluation process, please visit the "MY STRATEGY" section on my website.
For full disclosure, I should start by mentioning that at the time of writing this analysis, I do own shares in Games Workshop. If you would like to see the stocks in my portfolio or copy my portfolio, you can do so on eToro, You can find instructions on how to do this here. Thus, I do have a personal stake in Games Workshop. If you want to purchase shares (or fractional shares) of Games Workshop, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started with investing with as little as $100.
Founded in 1975 in London, United Kingdom, Games Workshop has established itself as a vertically integrated business. The company is involved in the design, manufacturing, distribution, and sales of fantasy miniatures and related products. These miniatures are drawn from its proprietary sci-fi and fantasy universes, including Warhammer: Age of Sigmar, Warhammer 40.000, Warhammer+, Warhammer: The Horus Heresy, Warhammer: The Old World, Necromunda, and Blood Bowl. Additionally, Games Workshop publishes short stories, audio dramas, full-length novels, and audiobooks under the Black Library imprint. As an international business, Games Workshop is centrally managed from its headquarters in Nottingham, United Kingdom, with 78% of its sales generated outside the United Kingdom. The company operates two primary factories, a paint factory, two warehouse facilities, and the Warhammer Studio. It operates in two segments: Core, which accounts for approximately 94% of revenue, and Licensing, which contributes around 6%. Core revenue is generated through three channels: 'Retail,' 'Trade,' and 'Online.' The Retail segment includes Games Workshop's own stores, which serve as hubs for the Warhammer hobby in their respective regions. These stores exclusively stock Games Workshop products and are the primary means of recruiting new customers. By the end of the fiscal year 2024, the company operated 548 retail stores across 23 countries, 412 of which were single-staff stores. Retail contributes approximately 23% of core revenue. The Trade segment consists of third-party independent retailers that sell Games Workshop products globally, in regions without company-owned stores. By the end of fiscal year 2024, Games Workshop had partnerships with .200 independent retailers across 71 countries, accounting for approximately 58% of core revenue. The Online segment refers to the company's online store, which contributed about 19% of core revenue. The Licensing segment involves granting licenses to carefully selected partners, allowing them to exploit Games Workshop's intellectual property (IP) to expand the presence and brand exposure of Warhammer globally. This often includes entering new markets such as media and entertainment, particularly video games. Warhammer is not only the most popular miniature wargame globally but also ranks among the most recognizable brands in the fantasy genre, forming the cornerstone of Games Workshop's moat.
Kevin Rountree serves as the CEO of Games Workshop. He joined the company in March 1998 as an assistant group accountant and subsequently held various management positions, including head of sales for the Other Activities division, which encompasses Black Library, Licensing, and Sabertooth Games. In October 2008, Kevin was appointed Chief Financial Officer (CFO), and on 1 January 2015, he assumed the role of Chief Executive Officer (CEO). Kevin is a qualified Chartered Management Accountant, having previously worked as a management accountant at J Barbour & Sons Limited before joining Games Workshop. Under Kevin Rountree's leadership, Games Workshop has continued to prosper and evolve, solidifying its position as a leading entity in the tabletop gaming industry. He is recognized for his unwavering dedication to the company, and his significant contributions have earned him a respected standing within the world of tabletop gaming. His tenure has seen Games Workshop maintain and expand its appeal to enthusiasts worldwide, delivering immersive gaming experiences and high-quality miniatures. While detailed public information about Kevin Rountree is limited, the financial and operational metrics explored later in this analysis demonstrate the remarkable success he has achieved at Games Workshop. Moreover, his high approval rating of 91% on Glassdoor reflects his popularity within the company. These factors - his extensive experience, steadfast dedication, impressive results, and strong approval ratings - suggest that Kevin Rountree is well-suited to continue leading Games Workshop into the future.
I have determined that Games Workshop has a moat. And I feel very confident about management as well. Now, let us analyze the numbers to determine if Games Workshop meets our criteria for possessing a strong competitive advantage. In case you want an explanation of what the numbers represent, you can refer to "MY STRATEGY" on the website.
The first metric to examine is the return on invested capital (ROIC). Our analysis criterion necessitates a 10-year history with all figures exceeding 10% annually. Games Workshop has consistently demonstrated a robust ROIC, with no annual figures falling below 20% over the past decade. Notably, the ROIC has exceeded 47% every year for the past eight years, a level of consistency rarely observed in most companies. Although there was a slight decrease in ROIC during the fiscal years 2022 and 2023, this decline is not cause for concern, as the ROIC remained above 47% in both years. Remarkably, Games Workshop managed to increase its ROIC once again in fiscal year 2024, despite the macroeconomic challenges faced by many companies during this period. This resilience underscores the company's strong financial performance. In summary, the ROIC for Games Workshop is exceptionally impressive. While there has been some decrease compared to its historical peaks, this should not be a source of concern. The company's ability to maintain such high levels of ROIC over an extended period highlights its effective capital management and strategic strength.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. I don't have the growth rate from 2013 as Finbox only provides data for the past ten years. Games Workshop has successfully grown its equity each year, with the exception of fiscal year 2023, a period that presented challenges for many companies. However, the company rebounded in fiscal year 2024, once again increasing its equity, which is a highly encouraging sign. Although the annual increase in equity has not consistently reached 10%, the overall trend remains positive and reassuring.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is unsurprising that Games Workshop has consistently generated positive free cash flow every year over the past decade. Notably, the company has experienced only one year of decreased free cash flow during this period, which is a testament to its strong financial performance. Moreover, it is particularly encouraging that Games Workshop achieved its highest free cash flow to date in fiscal year 2024. The levered free cash flow margin has also remained consistently high, especially over the past eight years. Although there was a slight decrease in the levered free cash flow margin in fiscal year 2024, it still represents the second-highest margin in the past decade. Additionally, the free cash flow yield has reached its highest level since 2018, suggesting that the shares may be trading at an attractive valuation, which is something we will revisit later in the analysis.
Another critical aspect to consider is the company’s debt levels. It is essential to evaluate whether a business maintains a manageable level of debt that can be repaid within a three-year period, typically assessed by dividing the total long-term debt by earnings. Upon reviewing Games Workshop's financial statements, it becomes clear that the company has no debt. Furthermore, there is no indication that Games Workshop intends to take on debt in the future. The company’s annual report reinforces this position, stating: "Maintaining a straightforward approach to our finances helps—we have no debt, we don’t hedge against currency movements, and we distribute truly surplus cash to our shareholders as a dividend." This prudent financial management is highly encouraging, suggesting that debt is unlikely to become a concern for investors considering Games Workshop.
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Based on my findings thus far, I find Games Workshop to be an intriguing company. However, it is important to acknowledge that no investment is without risk, and Games Workshop is not an exception. One significant risk is its dependence on a niche market. Games Workshop operates predominantly within the specialized market of miniature wargaming, targeting a dedicated audience through its flagship products, such as Warhammer 40.000 and Warhammer Age of Sigmar. This segment requires substantial time, financial investment, and skill from its customers, which inherently limits its appeal compared to broader gaming markets. While Games Workshop has successfully expanded globally and cultivated a strong community, the specialized nature of its products imposes a natural limit on its potential customer base, raising concerns about market saturation and the company’s ability to sustain future growth. Additionally, shifting consumer trends toward more digital or casual gaming experiences could pose further challenges to the company, particularly if younger generations are less inclined towards traditional, labor-intensive hobbies. Another significant risk for Games Workshop is the protection of its intellectual property (IP). The company’s IP is the cornerstone of its business, encompassing the distinctive worlds, characters, and lore that are central to its flagship products, such as Warhammer 40.000 and Warhammer Age of Sigmar. Games Workshop's growth and market position are heavily reliant on the successful development and exploitation of this IP, which not only drives product innovation but also reinforces brand recognition and customer loyalty. However, the risk associated with failing to protect this IP is substantial. Unauthorized use or counterfeiting could undermine Games Workshop's competitive advantage, enabling others to profit from the company’s creative assets without equivalent investment in quality and development. This not only jeopardizes the uniqueness of their offerings but also poses a threat to the brand's reputation. If the integrity of their IP were to be compromised, it could result in a loss of consumer trust, a decline in sales, and ultimately a negative impact on the company’s financial performance. Therefore, protecting their IP is essential for maintaining market leadership and ensuring long-term success. Another notable risk is the potential loss or disruption of key manufacturing and warehousing facilities. Games Workshop’s operations are heavily reliant on its primary manufacturing and warehousing sites located in Nottingham and Memphis. These facilities are crucial for the production and global distribution of the company’s products, forming the backbone of its vertically integrated business model. Any significant disruption to these facilities—whether due to the impacts of climate change, physical damage, capacity limitations, or failures in IT systems—could pose major challenges. Such disruptions may lead to delays in product availability, increased operational costs, and lost sales. Moreover, they could damage the company’s reputation for reliability and customer service, potentially resulting in long-term harm to customer loyalty and market share. Therefore, ensuring the continuous and efficient operation of these facilities is critical for sustaining Games Workshop’s ability to meet customer demand and maintain its competitive position in the market.
There are several compelling reasons to consider investing in Games Workshop, one of which is its store growth strategy. This strategy is a key driver for investment, as it not only expands the company’s global presence but also enhances customer engagement through its physical retail outlets. These stores serve as vital community hubs where enthusiasts can gather, learn about the games, participate in events, and develop a deeper connection with the Warhammer brand. This fosters a loyal customer base, which is crucial for the company’s long-term success. Games Workshop’s expansion into key regions such as North America, Continental Europe, and East Asia, along with emerging markets like Latin America, opens up new revenue streams and diversifies its geographic footprint. Moreover, the expansion of partnerships with independent retailers enables Games Workshop to reach a wider customer base, particularly in regions where opening company-owned stores may not be feasible. This dual approach—combining company-owned stores with a broader retail network—ensures comprehensive market penetration and positions the company for sustained growth. Another compelling reason to consider investing in Games Workshop is its licensing segment. Licensing offers a significant growth opportunity for the company, allowing it to expand the Warhammer brand into highly lucrative markets such as video games, television, and film. Through strategic partnerships, including the notable deal with Amazon to develop Warhammer 40.000 into films and television series, Games Workshop has the potential to significantly increase its global brand exposure and reach new audiences. Furthermore, the video game segment remains a strong source of revenue, introducing the Warhammer universe to a broader demographic. Although the success of these licensing ventures largely depends on the performance of their partners, the potential for substantial revenue growth and the expansion of Warhammer’s cultural footprint make this strategy an attractive investment consideration for Games Workshop. Another compelling reason to invest in Games Workshop is the success of Warhammer+. This subscription service significantly diversifies the company’s revenue by offering exclusive digital content, including animated shows, apps, and tutorials specifically designed for dedicated Warhammer enthusiasts. Warhammer+ has demonstrated promising growth, with subscriber numbers increasing to 176.000, up from 136.000 the previous year. This growth highlights the strong demand for digital content and the platform’s appeal within the Warhammer community. The success of Warhammer+ reflects its ability to resonate with its target audience, and the subscription model—priced at £5,99 per month or £4,99 per year—provides a stable and predictable income stream that bolsters the company’s financial stability and supports long-term growth. Additionally, Warhammer+ underscores Games Workshop’s commitment to digital innovation, enhancing customer engagement and positioning the company for future growth in the expanding tech-enabled entertainment market.
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Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 4,48, which is from fiscal year 2024. I have selected a projected future EPS growth rate of 12%, which reflects the growth rate observed over the last 12 months. Additionally, I have selected a projected future P/E ratio of 24, which is twice the growth rate. This decision is based on Games Workshop's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be £84,39. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Games Workshop at a price of £42,19 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 196, and capital expenditures were 16. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 11 in our calculations. The tax provision was 52. We have 32,952 outstanding shares. Hence, the calculation will be as follows: (196 – 11 + 52) / 32,952 x 10 = £71,92 in Ten Cap price.
The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Games Workshop's Free Cash Flow Per Share at £5,48 and a growth rate of 12%, if you want to recoup your investment in 8 years, the Payback Time price is £75,49.
I find Games Workshop to be an intriguing company with strong management. The company possesses a significant competitive advantage through its Warhammer brand, and I appreciate that it has a clear and focused strategy: to create the best fantasy miniatures in the world, to engage and inspire its customers, and to sell its products globally at a profit. In its annual report, the company emphasizes its commitment to long-term success over short-term gains, a principle that aligns with my personal investment philosophy. Games Workshop has consistently delivered a high return on invested capital (ROIC) and has increased its free cash flow in nine out of the last ten years. The company operates primarily in the niche market of miniature wargaming, which naturally limits its potential customer base, this specialization also raises concerns about market saturation and future growth. The company’s intellectual property (IP) is the cornerstone of its business, encompassing the distinctive worlds, characters, and lore that drive its flagship products like Warhammer 40.000 and Warhammer Age of Sigmar. If the integrity of this IP were to be compromised, it could lead to a loss of consumer trust and a decline in sales. Additionally, Games Workshop’s operations are critically dependent on its key manufacturing and warehousing facilities, given its vertically integrated business model. Any significant disruption to these facilities could have both short-term and long-term impacts on the company. Games Workshop continues to expand its global presence by opening new stores, which helps to cultivate a more loyal customer base. Furthermore, the company’s licensing segment presents a significant growth opportunity, allowing it to extend the Warhammer brand into lucrative markets such as video games, television, and film. Lastly, the Warhammer+ subscription service continues to grow, providing a steady and predictable income stream. Overall, I am very optimistic about the company’s prospects, and I believe that purchasing shares below £105, representing a 30% discount on intrinsic value based on the Ten Cap Price and Payback Time price, would be a sound long-term investment.
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