2023 has been a tough year for the UK-focused FTSE 250 as worries over the domestic economy have mounted. But Games Workshop (LSE:GAW) has had no such problems: in fact its reputation as one of London’s brightest growth stocks has improved.
Since 1 January the fantasy wargaming giant has risen 10% in value. During the last five years its share price has increased a staggering 207%.
But the Warhammer manufacturer’s shares slumped 11% on Thursday following a first-half trading update. I think this represents an attractive dip buying opportunity, and here is why.
Signs of slowdown
Games Workshop has proved remarkably resilient in spite of the squeeze on consumer spending. This is testament to the cult following its products attract: its fans find ways to fund their hobby even during tough times.
So signs of a sales slowdown last quarter has come as quite the shock to investors.
On Thursday the company predicted core revenues (at constant currencies) of “at least” £235m for the first half (ending 26 November), implying growth of 11%. Sales were up 14% in the first quarter, it had earlier announced, which implies a decent slowdown during quarter two.
To add to the gloom, licencing revenues are expected to have dropped to around £12m from £14.3m a year earlier. Pre-tax profit growth, meanwhile, is tipped to have risen 12% year on year to a minimum of £94m. This is disappointing given the 46% profits jump the firm enjoyed during quarter one.
Don’t panic!
As a Games Workshop shareholder myself I was somewhat taken aback by Thursday’s underwhelming update. But I haven’t pressed the panic button.
It’s worth remembering that Games Workshop’s blowout first quarter was driven by the massively successful launch of its Leviathan box set, the 10th iteration of its Warhammer 40,000 system. So a second-quarter slowdown was inevitable after the new product pulled demand forward.
The business was also facing more challenging year-on-year comparatives during quarter two. And finally, licencing-related sales at the business are notoriously lumpy.
A brilliant growth stock
In some ways Games Workshop is a victim of its own success. The business has a proud history of beating trading expectations (as its trading update in September recently showed). So anything other than a blockbuster release has the capacity to spook investors, as we saw this week.
The Nottingham business may have endured some turbulence in more recent months. But I expect profits to head to the moon in the years ahead as the tabletop gaming boom continues. A deal to make programming with Amazon could also be the first step to supercharging its licencing revenues.
Games Workshop has a long track record of unbroken annual earnings growth. And City analysts expect this to continue for the foreseeable future. Earnings are predicted to rise 7% and 6% in the next two financial years (to May 2024 and 2025, respectively).
Its shares aren’t cheap, even after last week’s fall. A meaty price-to-earnings (P/E) ratio of 21.5 times leaves it vulnerable to further share price shocks if news flow disappoints.
But as a long-term investor I’m happy to absorb any temporary choppiness. I believe the Games Workshop share price will soar over the next decade, and I plan to increase my holdings at the next opportunity.
