Games Workshop - undervalued?
Games Workshop (LON:GAW) and its subsidiaries design and manufacture miniature figures and games and distribute these through its own network of hobby centers, independent retailers and direct through the Internet and mail order. GAW is yielding 5.7%, and has net cash of £11.5m. It has a z-score of 8.11, giving it a "bullet-proof" balance sheet. Projected PBT for y/e May 2011 is £12m (a decrease from £16m in 2010), £15m for 2012, and £16m for 2013. Let's say that the long-term PBT is £15m. GAW has neglible interest, implying an EBIT of £15m also. According to Digital Look, it has an EV of £120m (which sounds about right to me). That gives it an EBIT/EV of 12.5% (= 15/120). This a very good unleveraged earnings yield. It earns high returns on capital (28%, according to Digital Look).
Three directors have just bought shares to the tune of £55k combined. A trading statement on 8 Apr 2011 is brief; PBT is likely to be ahead of market expectations, and cash generation remains healthy.
The directors seem frank and folksy, and it is like reading Buffett. In the y/e May 2010 accounts they admitted:
As we have stated in previous years, we believe that the key risks which face Games Workshop are not external but internal. We are not significantly affected by economic factors, as recent results show. Performance shortfalls in the past have been down to the quality of management and decision making.
GAW has a niche business. It is possible for the niche to grow, but I would not anticipate rapid growth. Think of it as a 5.7% inflation-linked bond, maybe with a little growth potential. My view is that it deserves a higher price on account of the current dividend yield. I had recently seen a detractor of the company rate it as a "strong sell", citing that "the company has never had a sale in twenty years". I take the opposite view on this little factoid: a company that hasn't needed a sale in the last twenty years must be in a pretty good business.
In conclusion: GAW is a company with a high dividend yield, excellent returns on capital, with a high unleveraged earnings yield. Directors have recently bought in, bolstering confidence in the likely sustainability of profits. It currently trades at a price to free cash flow of 7.4x, although 2010 was an exceptionally profitable year.
Disclaimer
This is not financial advice. Our content is intended to be used and must be used for information and education purposes only. Please read our disclaimer and terms and conditions to understand our obligations.
1 comment
Unfortunately I feel this this is somewhat of a naïve look at the company and quite superficial; it couches a undeveloped thesis in the current, while refusing to look to the past or the potential future. The real issue is management, growth and consistency of dividend - the management is poor, despite your “folksy” description and it’s hardly Buffet-like!! GAW is a poorly managed company with decreasing financial efficiency, decreasing profits and in danger of having its target audience die off, a point you summarily ignore. The management is overly compensated, entrenched and the fact they don’t entertain any sale suggestions, means they’re not trying to enhance shareholder value … which is their primary job! The dividend policy is relatively new and could be stopped by Kirby at any time, especially since he considers himself the emperor of this little gaming empire. Growth has been abysmal. The largest consumer market in the world is massively undersold, and frankly outside the UK, penetration is minimal! They have assets that could be exploited at very modest risks and there are whole geographic and product markets they are ignoring at their peril … since their target audience is somewhere between aged and death!
GAW got real lucky when they got you writing on them … if Goldman or JP Morgan followed this stock they’d be ripping Kirby a new-one for everything I outlined previously. Unfortunately, the stock is largely controlled by 4/5 passive and very uninterested shareholders, that are content to clip coupons for a while and are unlikely to do much of anything until something dramatic happens to the company or Kirby. Were this a US based company, the activists would be all over it and they would be agitating for change in management and direction. Which really is too bad, because there’s so much value to unlock in this company and it has real potential. Too bad … but the shareholders probably deserve what they get with Kirby!