Games Workshop hits on the right formula and Somero’s profit warning out of management control

Friday, June 7, 2019 - 09:39

“The FTSE 100 was back above the 7,300 level on Friday as investors flocked to snap up big names with lots of dollar-denominated earnings including British American Tobacco, Evraz, Ashtead and Ferguson,” says Russ Mould, Investment Director at AJ Bell.

“A rebound in oil prices also gave support to the blue chip index, pushing up shares in BP and Royal Dutch Shell."

Games Workshop

“In typical Games Workshop fashion, its trading update is light on detail but containing the right message in which to satisfy the market.

“This truly is a business which has hit the right formula to drive up earnings. Historically it rode the hype around Lord of the Rings as the public snapped up miniature fantasy figures, however that catalyst soon fell away once the film series had ended.

“This time round it has established a bigger group of fans buying into its Warhammer brand and other items, and is not simply relying on a successful film or book series to drive business.

“The huge popularity of fantasy series Game of Thrones may have helped raise interest in its products but its fortunes are by no means tied to this TV blockbuster remaining in fashion.

“While a lot is said about its skills in making miniature models and creating imaginary worlds, perhaps one of the underappreciated points about the company’s success is the way it engages with customers.

“Visit one of its stores and you’ll find enthusiastic staff who aim to interact with everyone who steps through this door. This creates a feeling of being part of a community, thus strengthening loyalty and raising the likelihood of repeat purchases.

“Ultimately it is a very well-run company that invests in its business and its staff and that should put it in a strong position to be around for a long time.”

Somero Enterprises

“Although construction equipment group Somero isn’t a household name, it has a big fan base among retail investors who have the confidence to pick their own stocks.

“Today’s setback is a good example of how you need to judge a profit warning on what’s caused it and whether it was avoidable.

“Somero has fallen foul of bad weather in the US which has delayed construction projects and the pace at which companies buy its equipment.

“That’s totally out of the hands of its management and so the subsequent hit to earnings isn’t a reflection of poor decisions or ineffective actions.

“The company and its shareholders will be frustrated that earnings and dividends expectations will have to be downgraded, yet Somero has been through these weather problems before and bounced back with confidence.

“Fundamentally the demand picture for its concrete levelling equipment hasn’t really changed beyond the timing of projects that require its kit. Customers are still incredibly busy which suggests Somero could rebound once the rain stops.”

These articles are for information purposes only and are not a personal recommendation or advice.

The daily market update is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.