GW stock drops 10% after cryptic warning to investors

[Aqui]

=][= We need to rein in back the talk about whether or not regular Marines are being phased out. That's not the topic in discussion here =][=

[N1SB]

Hi guys, was talking to a person who is basically the equivalent of a CFO, i.e. not only is he more senior and smarter than me, but also more used to dealing with his own shareholders.  He knows "the game" better than me so I listen to him as I listen to you guys.  I didn't ask him about this, he raised the issue with me anticipating my question, and I think he's got a grew view but just a little cynical  (but not pessimistic, there's a difference, I'll explain).
 
Long story short - whereas my take is GW was looking at its performance in the past (i.e. their summer quarter, their most important time) and giving a fair heads up that they're still doing awesome (revenue up) but not as awesome as when they launched a new edition of 40k (profit steady but not up substantially) because they're working on something, his take was they're issuing a profit warning now so they can blame the Brexit in the future.

 

To be clear, it's not political, it's not doom & gloom...it's just (his significant and admirable experience) answering shareholders' tough and often rude questions.

 

Imma put in into 40k terms (in the hopes of removing the political or finance jargon, and please don't get hung up by my awful metaphors), the Brexit is like a Big FAQ.  We have some theory what's coming (like we're looking at the past beta rules that may become real rules), but despite the rampant speculation no one really knows (like we hear rumours, but we had no idea until the recent Big FAQ landed), yet we all kinda got the understanding it'll nerf rather than help certain armies.

 

His point is, whatever the Brexit brings, GW is putting out a statement now just so that they say later "see, the Brexit screwed us, we tried to tell you, it's not our fault."

 

Those are my words, not his, but I put it that way because it's something we can all relate to; at some point in our jobs, we've got some ready-made excuse in our pockets ready to go.  It's a case of shielding one's own rear armour/covering of backsides for any situation, in advance, to just blame it on the Brexit.  Other companies will do the same.

 

Thus, it's not pessimism, he believes in GW, though he does acknowledge it's growing so white hot it can't go on like this forever without melting down, but it is cynical in how he sees how businesses do treat their shareholders.  He's not wrong, they're not wrong, it's just this expectations game.  I found it hilarious because it's so true!  We've seen this before.  Everything got blamed 10 years ago on the subprime mortgage crisis, then before that it was the dot-com bubble bursting, etc.

 

+++++

 

In early 2017, I remember  in this very forum in a thread about "good news" about GW's financials, after a long analysis, I said "Recommendation: BUY (GW stock)".  I didn't mention it at the time, but I really worried about writing that line.  Because if you listened to me your stock is worth about 5 times more than what it was then...but that's increasing your net worth not mine...and if I was wrong y'all just declare Exterminatus on me.

 

At this point, I want to say "Recommendation: HOLD/WAIT...then WAIT just a bit longer."  In other words, if you got GW stock, great, but wait and see to buy.

 

Nothing wrong with GW IMHO, I like everything I'm seeing from them.  I just feel there's something wrong with the market at the moment.  Don't worry, it's not the end of the world, it's just this is the wait & see time, like you don't want to buy any miniatures until you see the upcoming Codex yourself.

 

And when I say the market, it's not politics, it's not just Brexit or this tariff or that politician, if you have read or go to see my previous posts, I don't really focus on that.  I'm looking at other stuff and I just had a bad feeling for awhile now.  It's like an old person who knows it's going to rain because his knee hurts.  I really don't want to explain it publicly as it's irrational, but the feeling is there.

 

Something is going to cause a downward spiral for a bit, coming in the coming year or so.  Then just when we think the worst is over...it gets worse.  Then after that it should be good and at that point it really would be a cool time to start investing in the market again.

 

Don't worry too much though.  You're savvy guys, you know when people call it a bear market, it means it's bad (vs. the good bull market).  Remember that the bear hibernates through the harsh winter, because it knows spring will come back one day.  We can learn much from the bear.

[Captain Idaho]

Interesting discussion and often information way (way) above my head.

 

I'm particularly interested in what sort of sales GW are getting over time compared to splash releases. Boxed sets sell like hot cakes. No denying that. GW have moved to a business model that is focusing a large amount of time on boxed sets (I include board games releases in this since they're similar in all intents and purposes).

 

We know Dark Imperium went like the clappers but I find it hard to believe folk are buying into Primaris single releases at the prices they are, especially when they can buy a boxed set for so much cheaper. An example here is the price of a solo Primaris Captain for £22.50 - a quarter of the entire price of a boxed set.

 

Alas we don't have sales data but I wish we did.

[Brother Casman]

Stumbled across an article from the Financial Times that seems related to the topic at hand?

[Cryptix]

It PTV.

[N1SB]

I'm particularly interested in what sort of sales GW are getting over time compared to splash releases. Boxed sets sell like hot cakes. No denying that. GW have moved to a business model that is focusing a large amount of time on boxed sets (I include board games releases in this since they're similar in all intents and purposes).

 

Alas we don't have sales data but I wish we did.

 

 

That's right, oh man even if GW broke things down a little bit (like sales by their product LINES of AoS, 40k, LotR, etc.) that'd be great.  They're under no obligation to do so and it's actually even vaguer in the video gaming industry, so it's not like they're being too shady (just the standard, acceptable level of grey).

 

But some information is better than no information, and certain things IMHO are noticeable.  Not pointing to just 1 line of 1 report, but over time, I kept these ROUGH rations in mind (because I look for trends, it's not worth remembering every single number as they keep changing).  Some that stick in my mind:

 

- GW revenue ROUGHLY divided 1/4 in UK, 1/4 in North America (growing), 1/4 in Europe, everything else (Asia, licensing) is the last 1/4

- "Fantasy" is smaller than 30k/40k, and ROUGHLY I'd say it's a 1:2 ratio (i.e. 40k sales is maaaybe roughly double that of AoS)

- old/new product sales used to be 70% old/30% new, but last year it's 60% old/40% new...meaning stuff like Primaris selling way better

- FW is smaller than I initially thought, having 30k Mechanicum/IH army.  At a high point, it was roughly 10% of GW revenue overall I believe

 

But I think this was absolutely the right question to ask, with the following article in mind.  I'll get to this in the end.

 

 

Stumbled across an article from the Financial Times that seems related to the topic at hand?

 

 

Thanks for pointing out the excellent article.  Respecting both the rules of B&C and the FT's subscription, I can't just copypasta the whole thing in here, but I want to quote it and point out some stuff.  The goal is to provide another perspective for a more complete picture.  It does echo a lot of observations I previously made in my GW 2018 Annual Report Analysis from a different angle, like:

 

 

Warhammer creator a winner at communication

Games Workshop’s products may be confusing but it knows how to put across its strategy

 

 

I mentioned how GW's successful turnaround was attributable to its restarting its marketing, just simple customer engagement from the store to things like Warhammer Community.  The evidence isn't just its near double revenue since then, but just how we get our Warhammer news from GW, not from dodgy rumour clickbait.  It literally changed how we consumed media.  That's what this headline focuses on.

 

On the note of media, I periodically go on media training, these 2-day workshops to remind us of 2 important points: 1.) it's the editors, not the reporters, that write the headlines and 2.) both editors' and reporters' jobs is to turn in A Story.  It turns out the reporter's story is more than just about communications.

 

This headline focuses on just 1 aspect of what the reporter actually talks about, who simply tried to provide a fair point-counterpoint.  I'm not making any political points, it happens the disconnect between the headline and the article reminded me of that very learning, and it's useful to keep in mind.

 

The crux of the piece was as follows, then tries to explain it:

 

 

However, a share sale by former chairman Tom Kirby on September 27 unnerved investors. A trading statement on October 18 rattled investors even more. It talked of “some uncertainties” ahead while also noting that sales were beating last year’s record, and profits were at a similar level.

 

 

In short, the same share sale by the former chairman and "uncertainties" the original post alluded to.  IMHO, the actual profit warning was the real issue, as I previously pointed out...but he's writing A Story, so I understand.  We agree on most things, like the article mentions how top line growth is vital, whereas I'd say GW has very fixed costs, so taking care of the top line will naturally take care of the bottom line.  Just less dramatic, in other words.

 

The article goes on to raise different points of view from analysts and investors, which is the good bit.

 

 

Charles Hall, of Peel Hunt, the house broker, raised his profit and revenue forecasts by 9 per cent after the statement and said the sell-off reflected wider market nerves. “Investors are looking for bad news not good news.” He is the only analyst to cover the company. “There isn’t another business you can compare it to.”

 

 

Investors looking for bad news isn't just confirmation bias, but also how they will over-react from that.  It's a very valid point, but the next one is what's interesting.

 

On how GW can't be compared to any other, it's SO true.  I know because I tried.  He's not just praising GW as unique, as an analyst he is trying to compare GW to other companies like how we analyse a 40k unit by comparing it to others.  We talk about MEQs and GEQs, break down a unit's points by looking at its statline and wargear, the goal of which is "should I get this unit?", but his question is "should I buy this stock?"

 

For example, I know GW miniatures gross margin is a little over 70% (i.e. you bought a $100 Titan might've cost $30 to make, but it's actually an average across all products).  But that's just a number by itself, it's like telling a totally new player getting into 40k via Kill Team "a Primaris is only 15 points!"  He doesn't yet know a Primaris normally costs 18 points in a regular larger game so 15 points seems cheap.  In my case, I actually looked up LEGO's, because they're also little pieces of plastic you gotta put together yourself.  I KNOW they're different, but it was interesting to find a LEGO's gross margin was ALSO a little over 70%.  It was an interesting reference point and I got the impression GW is up there with the best little pieces of plastic manufacturers.

 

And my conclusion was GW really is impossible to compare to anything else.  In product, I looked at LEGO.  In how they had Warhammer Stores as a major marketing cost, I looked at retailers and even Apple because of Apple Stores and GW's really different; this article goes out of its way to describe GW as a manufacturer and not a retailer, because many readers might know them only as Warhammer Stores.  The best thing to judge GW by, funnily enough, is GW in the past, and it's already blown past all expectations.

 

Thus, the article aptly ends with:

 

 

 

 

Mr Leach, who often drops into his local store in Sheffield — “last time it was so busy I couldn’t talk to the manager” — believes the shares could rise by another £10. Mr Hall is more cautious, believing the shares have hit a ceiling. He expects revenue of £235m and pre-tax profit of £68m for 2018. So at almost £1bn the group is valued highly at just over four times enterprise value to forward sales.

 

 

Has GW already hit its peak potential or has it more to grow, is the cliffhanger question.

 

It's a valid question without either being a GW fanboy or a GW critic; GW's been growing 30% to 40% every year with about 100% increase in profitability, Nottingham's only so big for them to build more plants on, etc.  The article does point out things like how Asia is still relatively untapped, further licensing deals, etc.  Doesn't mention about Sisters of Battle or the Regimental Standard (the greatest literature in all pop culture), though.

 

 

+++++

 

 

Sorry for the long post, no time for a short one.

 

But after reading Brother Idaho's point then this article, I noticed it really glossed over something: GW's actual product lines.  Yes, it mentions a few miniatures by name for flavour, but for example it didn't really mention AoS 2nd edition launched within the timeframe as did Kill Team and Rogue Trader, wherein AoS was (supposed to be) a major flagship launch closer to 8th ed 40k than Kill Team.  I play AoS, we even have an AoS WhatsApp group for our Warhammer Store, but it's mostly filled with 40k chatter now.

 

The whole crux of the share drop is this profit warning.  I'm wondering GW over-invested in AoS 2nd ed and it hasn't paid off yet at least.  It's weird because profitability and cashflow aren't the same so unsold goods technically aren't a cost in and of themselves, but like the materials and extra overtime or utility costs should be...but they shouldn't be that much.  I dunno, I'm tired.  Neat article.

[Volt]

Couldn't this simply be people cashing in on the GW hype train? GW has been billed for a while as the fastest growing domestic British stock. While that trend might more or less continue for a while, riding that trend is always hedging your bets. Better to cash out now at the end of the year and laugh at the obscene amount of money you've made off the trade than lose out in the future. 

[N1SB]

An outstanding point, thanks for mentioning this so I can talk about it.

 

Summary - even before this, GW was making headlines as the biggest gainer in the FTSE 250 about this time last year, taking over better known brands (thanks to 40k 8th ed...that's YOU and me).  But how much was that hype worth?  I use P/E ratio to gauge that.  It had a P/E ratio of around 18 a few weeks before, now it's down to about 16.  Thus, while there probably was some speculation driving its share price up, it was quite tiny for a company with insanely good growth.

 

 

+++ here's what I mean +++

 

 

If you're following this, you're pretty savvy already.  You already know a P/E ratio is the Price-Earnings Ratio, or how much a stock costs vs. how much it pays you back a share of its profits per year (usually in quarterly installments but it varies).  A stock with a P/E ratio of 10, in the barest simplest terms, pays for itself in 10 years.  Now you can buy low sell high and unload that stock at any time, but that dividend payout is like the underlying value of why someone else would buy the stock from you.

 

And as with real life, you want to pay the lowest price possible for the best pay-off.  That means you want a lower P/E ratio.  On average, 10 to 20 is a good P/E ratio.

 

However, P/E ratios varies greatly from industry to industry and even company to company mainly because of one x-factor: how much is that company's profitability growing (or shrinking) to pay you those sweet, sweet dividends?  A old-school manufacturing company with little potential to grow, like a traditional car company, has a below-average P/E ratio of about 7 or 8.  But a tech company coming up with not just new businesses but could create whole new industries, like Google/Alphabet or Microsoft, is like 40.  Amazon is about 80.  Elon Musk's Tesla is about INFINITY...because it has yet to pay dividends, it's dividing by zero, but people are still buying into it because it could replace traditional cars (and all companies are like that at the beginning, even Apple was until recently).

 

So if there was a lot of hype around GW, I'd expect GW's PE ratio to be around something like Google/Alphabet or Microsoft of 40.  Hasbro, the toy company that owns D&D, just for the sake of a very imperfect comparison but at least a point of reference, has a PE ratio of an incredible 57.  Instead, it had a PE ratio of about 18 before and now it's down to 16.  GW's profitability doubled, then doubled again, in the last 2 years.  It would strike me as odd to just flatten out immediately, it's like a race car not simply braking, but just freezing mid-air like time stopped.

 

(A bunch of other factors affect this, like I notice American companies have a higher P/E than their counterparts in other countries.  It's like there's a lot more speculation going on, whereas other countries are more conservative.)

 

TL;DR - if there was hype inflating the share price, it really wasn't all that much.  If this is as bad as it gets, it's actually a really good buy in normal circumstances.

 

And again, the only reason I say HOLD/wait is because the Brexit is like a new edition or Codex or Chapter Approved, just hang on until you see updated rules.  Really, nothing wrong with GW, even though everyone's focused on their uncertainty, which we're not even certain what exactly they're so uncertain about.  I'm also fairly certain they're saving some massive must-have 40k Gathering Storm-like thing by next January, which will make the overall year look much better.

 

Edit - the analyst Charles Hall and I disagree, but I don't think he's being silly or anything.  In fact, of everyone mentioned in the article, his is the logic I most closely follow.  I think I can even guess where his revenue and profit forecast comes from as he's so logical.  He just hasn't factored something because he's being conservative, as his job requires him to be.  Total respect.