Shares in Games Workshop (LSE: GAW) were up over 5% in early trading this morning as the 234m cap released its latest set of interim results to the market. This builds on the 75% rise in the stock over the last six months alone. Lets take a look at why investors are flocking to the company.
In the six months to 27 November, revenue at the Nottingham-based maker of fantasy figurines jumped to 70.9m, a rise of 28% compared to the same period in 2015. Pre-tax profits came in at 13.8m well over 50% higher than last year and earnings per share rocketed 128% from 14.9p to 34p per share. Positively, there was growth in both retail and trade channels across all territories and an 8% rise in internet sales. Shareholders should be particularly pleased with the latter given the importance of offering a positive online experience for consumers these days.
Commenting on the results, CEO Kevin Rountree stated that the company had made good progress on strategic initiatives and that he was delighted that the firmsnew approach to marketing and merchandising had been warmly received by hobbyists. Although tight-lipped on plans for the future, he did reflect on his desire to build on these improvement in the second half.
So, a very encouraging update from the business, more than justifying todays rise. The question is whether the shares can continue their recent momentum.
Room to grow?
There remain many attractions to investing in Games Workshop. Shares currently trade on a reasonably low price-to-earnings (P/E) ratio of 13. A yield of over 6% on offer should also get income investors salivating, even if the level of cover has looked rather precarious over recent years.
Another appeal of the company is the excellent levels of return on capital it has managed to generate. Indeed, thanks to the improvements in operating profits, todays report highlighted a rise from 36% in November 2015 to 40% in November 2015. Generally speaking, companies achieving consistently high numbers on this ratio are those worth keeping an eye on. After all, the ability of a company to finance its own growth internally shouldnt be dismissed lightly.
Given the seismic political events of last year, its also encouraging that todays report identified the biggest risk to the company as being related to management and the need to retain great people. If this is what investors should be most concerned about, I doubt mostwill be losing sleep.
Despite this, its only natural if some investors choose to bank profits after such a stellar run. Those worriedthat shares have peaked may wish to consider toy designer, developer and distributor Character Group (LSE: CCT). On a forecast p/e of just under 10, shares in the 108m cap are cheaper than Games Workshop, even though the formermanages to generate even larger returns on capital compared to its peer.
In December, Character which holds licences to brands including brands such as Peppa Pig and Teletubbies reported 22% increases in revenue and underlying pre-tax profits. The substantial 33% increase to the interim dividend leaving the companys shares offering a well-covered yield of 3.3% for 2017 is another bonus. With 29m cash on the balance sheet far exceeding that of Games Workshop and a growing international presence, I think the New Malden-based companys prospects are just as good as those of the former.
If hunting for great companies at the smaller end of the market spectrum interests you, I strongly recommend you take a look at a special report penned by Mark Rogers, Head of UK Investing at the Motley Fool. Mark thinks he’s foundanother great opportunity, a company trading on a low valuation that could generate double-digit earnings growth at little cost.
Click here for your copy of Mark’s report. It’s completely FREE and without obligation.
Paul Summers has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.