How Games Workshop made the leap from contrarian value to soaring super stock

Tuesday, Aug 01 2017 by
How Games Workshop made the leap from contrarian value to soaring super stock

In 2014, Tom Kirby, the chairman of Games Workshop, told shareholders that it had been “a really good year” for the company. But the boss of the fantasy games and miniatures maker warned:

“If your measure of ‘good’ is the current financial year’s numbers, you may not agree. But if your measure is the long-term survivability of a great cash generating business that still has a lot of potential growth, then you will agree.”

In a way, Kirby’s comment underlined a question that’s nagged investors in Games Workshop in recent years. Is it a niche retailer in a dying market, or is it a business with a loyal, big-spending fanbase that’s utterly misunderstood?


For now, the answer is that Games Workshop has proved its doubters wrong. Over the past three years it has shown how a stock that was once an unloved contrarian value play can go on to reward investors handsomely. After three years of lacklustre price performance, it has raced to an all-time high this summer - rising 125 percent in 2017 alone. But could you have seen it coming?

The profile of a contrarian share

When Kirby (who was acting CEO at the time) addressed investors in July 2014 he endeavoured to smooth over a disrupted year. The business had restructured its retail operations and management systems, but these changes had dented sales. A profit warning six months earlier slashed 24 percent from the share price - and it went on to take nearly three years to recover the lost ground.

The sharply de-rated share price reinforced the profile of Games Workshop as a Contrarian share. Despite strong signs of quality in the business, the market was very wary of it, and the share price was marked down as a result - making it appear cheap. Through the lens of the StockRanks, it’s possible to see this very clearly...


Over the past three years there has rarely been any doubt that Games Workshop had the hallmarks of a decent quality business. Its QualityRank - Stockopedia’s own ranking measure of every company’s long term profitability, efficiency and safety - was persistently high and stable, at around 98/100. But why...?

Signs of a strong economic moat

A big part of the reason why Games Workshop is such a…

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Games Workshop Group PLC designs, manufactures and sells fantasy miniatures and related products. The Company's segments include Sales channels, Product and supply, Central costs, Service centre costs and Royalties. The Sales channels segment includes Trade, which sells to independent retailers and includes magazine newsstand business and distributor sales from its publishing business (Black Library); Retail, which includes sales through retail stores, its visitor center and global exhibitions, and Mail order, which includes sales through its Web stores and digital sales. The Product and supply segment designs and manufactures products and incorporates production facility in the United Kingdom. The Central costs segment includes its overheads, head office site costs and costs of running Games Workshop Academy. The Service centre costs segment provides support services and undertakes strategic projects. The Royalties segment includes royalty income earned from third-party licensees. more »

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16 Comments on this Article show/hide all

Ramridge 1st Aug '17 1 of 16

Hi Ben - Great piece. Thank you.
As a momentum player, although I made two profitable plays, once in early December (+34%) and the other in June this year (+28%) , I am firmly in the camp of those who believe this is a niche player whose future is limited.
But then I keep telling myself this is a generational thing, as difficult for me to understand and appreciate as gangsta rap.

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PhilH 1st Aug '17 2 of 16

In reply to post #203819

Investing is funny old game innit.
I picked them up at the start of July and I'm sat on a 24% gain in under a month.
It was a Minervini type play for me as stock broke new highs on the 7th July.

I like the positive progression of the 2 period averages for EPS and net margin over the last 5 periods plus positive progression in the 2 period average for sales.

Not quite what Minervini calls a code 33 (3 quarters of growth across EPS, Sales & Margin) but very good

Professional Services: Sunflower Counselling
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shipoffrogs 1st Aug '17 3 of 16

This has always been a great company judged on the key metrics of margins and ROCE run by shareholder-orientated management who distribute excess cash as soon as it piles up. It's had its occasional wobble and when factoring in price increases sales have been declining for a long time. This kept the share price in check for years.

Everything changed last autumn as it became clear that sales were breaking out, with a free kicker from the falling pound. Operational gearing has turbo charged the outcome.

Limited future? That's been said about this company for as long as I can remember.

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AstonGirl 1st Aug '17 4 of 16

A fantastic summary of £GAW's progress to date thank you Ben
I'm quite biased as I bought in at 553p & have happily added with each exceed expectations TU.
I plan to keep holding and/or adding unless the story changes

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Lucas 1st Aug '17 5 of 16

Ben, could you add a chart showing the history of a StockRank over time for GAW? It would be really interesting to see how the StockRank evolved from that profit warning in June 2014 until now and what was the stability / volatility of the rank? thanks, Lucas

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ricky65 1st Aug '17 6 of 16

Great write up Ben.

It met my Minervini criteria when it broke out in December 2016 at around 650p.

I do have reservations as miniature figures seem to go in and out of fashion every few years. I'm 28 and remember in secondary school some friends used to be crazy about Warhammer. This was around 2004 and I don't think it's a coincidence that the stock peaked in that year around 880p before retracing almost 90%.

Consequently, I'm wary about how much more this could have to run. It's looking extended to me. Perhaps this time it will hold it's gains but it's a stock I'd rather sell into strength Minervini-style than hold long term.

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rpannell 2nd Aug '17 7 of 16

The SR system was flagging this one up in December 2015 with a SR of 99 - value of 76, Q of 97 and M of 89. I bought then and watched the price sink until mid 2016 before it started its long term rise. I only bought it as part of a NAPS portfolio and glad that I did. I would not have touched it with a barge pole otherwise. It just shows you how the SR computers can push you out of your comfort zone of stocks to buy.

Many people have mentioned buying it as a Minervini stock, althought it has never met his criterion since it's price had decreased more than 45% in the past - too many stale bulls in his view.

A long term hold? Now, that the real question!

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brucepackard 2nd Aug '17 8 of 16

Like Burford this was one I bought years ago because I liked the way the Chief Executive wrote. I stuck with it because of the stockranks.

So a nice mix of combining stockopedia's quant model with my own qualitative "I like the way the management communicates."

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ls2g08 2nd Aug '17 9 of 16

I also wonder how much Trump has influenced this, lots of his followers call him the God-Emperor of Mankind which is a character from Warhammer 40K. Here is an article about it - The timeline of when they start reporting larger profits neatly match when Trump wins the presidency. Could of course be spurious correlation.

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andrea34l 2nd Aug '17 10 of 16

In reply to post #203911

Interesting comment... I recently bought VCP because I liked the no messing about approach to communication. Of course I thought the figures recently out were good too, though after a big rise in share price I wondered how much further it might rise, and when - well, it's already up over 10%, up a few pence every day... a bit like GAW

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ricky65 2nd Aug '17 11 of 16

In reply to post #203875

I disagree with your assertion that it has never met Minervini's criterion. My interpretation is that it has met his Trend Template criteria since December 2016. I can't find anything in his books to support your assertion that he wont buy a stock that has decreased more than 45% in the past. In fact on Twitter he's recently mentioned he's been long Citigroup. I know that declined far more than 45% during the 2008 financial crisis!

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peterthegreat 2nd Aug '17 12 of 16

Thanks for the article Ben. I had been aware of Games Workshop for many years and, on reflection, perhaps the reason I had never invested was because I couldn't fathom how anyone could enjoy the hobby on which their business is based. However, my interest in the company was stimulated when I noticed the share price increasing and that the company was earning increasing revenues from the royalties derived from the use of their characters in computer games. I do understand that computer games are really big business, even though I have never bought one, so I reckon these add another avenue of growth and underline the value of what perhaps could be called their intellectual property. I also agree with earlier discussions here that the CEO's comments are very down to earth and he appears to have a good, long term strategic view of the business. The icing on the cake was that one of my favourite fund managers, Keith Ashworth-Lord rates the company highly so I bought. In other words, it was not just momentum that attracted me, but there were also other factors which came together quite nicely.

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harrymunro 2nd Aug '17 13 of 16

Great article - I am a long term admirer of GAW having played Warhammer as a teenager. I was in the camp of believing that there wasn't much growth prospect however. That was until my 24 year old colleague got back into the game at the start of the year and has sunk hundreds of pounds into it - also saying that the new releases are better than they used to be. Apparently the average age of Warhammer players is in their 30s too. Those two facts are what convinced me to switch camps and believe that this is an investment worth having.

Also there is significant money to be found in the licencing of the brand to video games and books. The world that games workshop have created over a 30 year period is unique, continually developed and thus not easily replicated!

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adatherton 3rd Aug '17 14 of 16

It's the top share at your competitor analyst V*****v***

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seismo101a 6th Aug '17 15 of 16

In reply to post #204239

Its the licensing revenue growth that excites me about GAW too. There is an impressive number of video games set in the Games Workshop world on steam.

Warhammer: Total War PC game was well executed. It looks amazing. I would have loved to have played this in my younger years (As a teenager I used to play the Fantasy Battle miniatures game).

They are already taking pre-orders for Warhammer: Total War II (release date I think is 28 Sept 2017).

The growth in miniature sales surprised me. Very impressive. I was originally thinking that the success of Total War: Warhammer, would detract from miniature sales (as why would you continue to buy miniatures when you now have a PC fantasy battle game that animates them all so beautifully), but maybe its been the complete opposite. Its introduced Total War fans to the world of GW miniatures, and also vice versa (GW miniature fans buying Total War: Warhammer).

All in all so far so good with GAW. Don't really see what there is not to like about this one.

Certainly plan on letting this one ride until I'm stopped out. Long may the positive trend continue.

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Stuart Muxlow 23rd Aug '17 16 of 16

In reply to post #203839

It's a very funny old game this one, but as a player and shareholder, one that's taken a notable swing for the better for myself over the last year.

There's plenty of analysis of business performance out there, and it's great to see the improvements across numerous metrics, but lesser understood I think is the monumental shift in relationships between company and customers from very much love (the product) hate (the company) to rather more of a love-in at the moment, social media engagement is back up and running after some disastrous attempts, and is being well received.

As a player, I thought I'd just chip in a couple of observations to the ring:
I've never known so many other players spend so much on the hobby in such a short space of time since the new edition of Warhammer 40,000 was released, which I'm not sure the market fully comprehends, you have players buying:
i) New core rules and index books (temporary army specific rules until the codexes - below - come out) for each army. I dropped £120ish on a good selection of these, and EVERY player will have put in somewhere around £20-200 for these - something over and above normal hobby spending;
ii) New codexes (rule books) for 10 armies by Christmas, you're looking at a further £30/book here, with £10 for a set of cards that go with them;
iii) New Space Marine models - these are the golden geese of the product line and the completely re-modeled miniatures seem to be well received;
iv) The new computer game coming out in Sept which I don't play but seems to be highly anticipated.

As a further thought, the main point of the core rules is to make the game easier to play, and anecdotally a number of players have come back to collecting / playing as the previous version of the rules had become too boring (6th edition of the rules) or too unwieldy (7th edition), whereas the new 8th edition seems to set the level of complexity just about right.

Purely in my opinion, I'd expect this financial year to be really quite remarkable as it feels like every big lever GW has to extract cash (from increasingly happy to drop it) customers seems to have been pulled. My main area of concern looking forward are whether this run can continue beyond the 17/18 financial year,. I'll start looking for clues on this post Christmas 2017.

I'm personally holding pending the next couple of Trading Statements to see whether I've guessed this right or not.

Make of that what you will, I just hoped to chip in a few thoughts on this company that I'm aware can be really, really difficult to understand just what the hell it does!

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About Ben Hobson

Ben Hobson

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