Games Workshop (LSE: GAW) is my favourite FTSE 250 stock. I even dedicated a playful Valentine’s ode to it back in February, where I said it was “destined for a promotion to the FTSE 100“.
Since then, the stock has rocketed 38% and recently hit an all-time high. In the past few days alone, it’s increased nearly 15%, bringing it to the verge of joining the blue-chip index.
Including dividends, the five-year annualised return now stands at an impressive 21%.
What’s caused this latest jump in the share price? Let’s take a look.
Trading update
Shareholders can thank a brief update from the tabletop wargames master late last week (22 November). In this, the group confirmed that trading was ahead of expectations for the six months to 1 December.
At current exchange rates, it estimated that core revenue would be at least £260m, up from £236m the year before, and licensing revenue would surpass £30m, up from £13m.
Meanwhile, pre-tax profit is expected to be “not less than” £120m — at least 25% higher!
During this period, the company released the fourth edition of Warhammer Age of Sigmar. It featured numerous updates, including new miniatures, revised rules, and a new game mode called ‘Spearhead’. It went down a treat with the Warhammer faithful.
The licensing growth stood out to me. This lucrative revenue stream comes from the monetisation of its treasure trove of intellectual property. This includes video games, books, merchandise, and potential future collaborations with Amazon to create TV shows and movies set in the Warhammer universe.
In September, video game Space Marine 2 was successfully released, which may well have brought new customers into the wider Games Workshop ecosystem.
The Footsie’s on the horizon
The FTSE 100 gets rebalanced every quarter to ensure that the index accurately represents the 100 largest companies listed on the London Stock Exchange by market capitalisation.
Right now, Games Workshop easily makes the cut with its £4.4bn market cap. It’s more than double that of FTSE 100 housebuilder Vistry Group (£2.1bn), whose share price has crashed 53% inside three months.
Here are the three FTSE 250 stocks with the highest market caps.
FTSE 250 stock
Market cap
Alliance Witan
£5.1bn
St. James’s Place
£4.6bn
Games Workshop
£4.4bn
And the Footsie’s lowest…
FTSE 100 stock
Market cap
Vistry
£2.2bn
Frasers Group
£3.4bn
B&M European Value Retail
£3.5bn
The next reshuffle will take place in December, based on earlier calculations. So I think it’s just a matter of time now until Games Workshop joins the UK’s premier index.
Will I buy more of its shares?
I’m always open to adding to my favourite stocks. However, I note this one’s quite expensive now, trading on a forward price-to-earnings (P/E) multiple of 27. That doesn’t leave much margin of safety.
For example, if the company fails to agree creative guidelines with Amazon Studios over the proposed Warhammer content, then investors might worry about the firm’s licensing revenue growth. In this scenario, I could imagine the stock selling off quite heavily.
As things stand though, I’m happy to hold my shares in Games Workshop for many more years. The company boasts enviable profit margins, an immaculate balance sheet, and very capable management.
There’s also a 3.1% dividend yield, meaning the stock offers a perfect mix of growth and income potential.
The post After jumping 15%, my favourite FTSE 250 stock looks set for the premier league appeared first on The Motley Fool UK.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Ben McPoland has positions in Games Workshop Group Plc. The Motley Fool UK has recommended Amazon, B&M European Value, Games Workshop Group Plc, and Vistry Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
