(Bloomberg Opinion) — Thanks to Brexit and a dearth of racy, homegrown tech companies, the U.K. stock market has gone pretty much nowhere over the past five years. By comparison, an investor who bought an S&P 500 Index fund and reinvested dividends would have almost doubled their money.(2)
Happily, there’s a British company whose stock market performance has done miles better than that, outstripping even Amazon.com Inc. and Tesla Inc. Remarkably, the core of this business is unashamedly analogue, not digital.
I’m talking about Games Workshop Group Plc, the Nottingham-based manufacturer of tabletop, post-apocalyptic fantasy game Warhammer 40,000. Surprisingly high quarterly sales and profit, coupled with the promise of a chunky payout, lifted the shares by another 10% on Thursday, swelling the market capitalization to 3.2 billion pounds ($4.2 billion). That’s more than U.K. high street clothing and food giant Marks & Spencer Group Plc.
The stock has gained almost 1,600% over the past five years and shareholders who reinvested dividends have enjoyed a 2,140% return, by far the best performance on the FTSE All-Share Index. In percentage terms only two Nasdaq 100 constituents — Advanced Micro Devices Inc. and Nvidia Corp. — have done better in the same period, according to data compiled by Bloomberg. Besides BlackRock Inc., Games Workshop’s largest shareholder is JP Morgan Chase & Co.’s asset management arm. Could it be that Jamie Dimon is a fan of miniature space marines and monsters?
For the uninitiated (I include myself in that description), Warhammer hobbyists purchase small plastic goblins and orcs and spend countless hours painting the miniatures and modeling fantastical landscapes. Battles are fought either at home or at one of the company’s retail outlets. The outcome is decided by rolling dice, along with the player’s tactics and strategic acumen, of course.
You might think this niche type of gaming would struggle in the era of elaborate and free-to-play mobile games such as Fortnite and Call of Duty. Social distancing rules have made it harder to meet up with groups of friends. But the in-person dynamic is clearly something Games Workshop is proud of. “Our games are played between people present in a room, not with a screen. They are truly social and build a real sense of community and comradeship,” the company states on its website. Collecting a mighty army doesn’t come cheap either — a potential problem during a recession.
Yet business is booming, thanks to online sales and the company’s efforts to engage and connect players via social media and its website. Users of the Warhammer-community site increased by almost 40% to more than 8 million last year.
As with jigsaw puzzles, painting miniature space warriors is even more appealing when lockdowns mean there’s little to do in the “real world.” The company also publishes an extensive line of books. Of the 270 million pounds of total annual revenue, about three-quarters comes from overseas; North America is now the largest market. Teenagers aren’t the only target demographic — grown-ups are fanatical about the game too. It helps the hit Netflix TV series Stranger Things has given tabletop gaming a sprinkling of retro cool. Dungeons & Dragons, first created in the 1970s and now owned by Hasbro Inc., features prominently in the show.
Games Workshop stands out not just because of its unusual line of business for a high-flying stock, but also its conservative management style. Its financial statements are a model of clarity and devoid of flattering adjustments that feature all too prominently in many companies’ disclosures.
The company doesn’t have any debt and investments are funded entirely from its own cash flows. It’s all refreshingly old-school.
Thanks to a large cash buffer, Games Workshop didn’t face financial difficulties when its stores and factory were forced to close for several weeks in the spring. So it’s able to keep paying dividends. Sadly few U.K. retailers can say the same right now. (1)Operating profit margins are an astonishing 33%, or about the same as Facebook Inc. The retail outlets typically have just one enthusiast employee, which keeps costs down.
Of course, Games Workshop’s valuation is now well beyond what one might describe as restrained. The 42 times forward earnings multiple is a lot for a business that says it can’t know for sure what the long-term impact of the pandemic will be. Games Workshop already earns chunky royalties from licensing its intellectual property for use in video games and has talked about doing the same for television. Most of the latter type of projects remain at an early stage though.
Still, if someone tells you the high street has a dark future, remind them that selling table-top battle games is a path paved with gold, as well as gore.
(1) In local currency terms
(2) Games Workshop initially accepted furlough money but later decided to refund the government.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.
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