Shares for the future: still my third-highest-scoring stock

The year to March 2026 was the year Latham (James) (LSE:LTHM) started to spend the windfall it earned in 2022 and 2023 in earnest.

The distributor has broken ground on its new National Distribution Centre (NDC), a long-term investment that should cement its market leadership.

While the NDC is being built, though, it is gobbling up cash and dragging profitability down.  

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Solid as oak

James Latham may be the only company I follow that states that there is a low risk from competition from new and existing businesses in its risk report.             

It supplies timber merchants, joiners, kitchen and furniture manufacturers and shopfitters, mostly with timber products.

These include high volumes of low-margin commodity products like Medium Density Fibreboard (MDF), Oriented Strand Board (OSB), Plywood, and hardwoods imported from North America, Europe and Africa.             

It also supplies speciality products including door blanks, melamine, laminates and other decorative panels, decking and engineered woods like Accoya and WoodEx®. Some, like WoodEx, are exclusive or own brands.    

Latham manufactures decorative mouldings and cladding at Latham Timber Manufacturing, acquired in 2019.

Right place, right time

Latham’s status as the largest independent distributor is the result of decades of self-funded investment in depots and stock.

The NDC in Chatteris, Latham’s biggest investment ever, will change the shape of its distribution network. The company has 14 UK depots including two in Northern Ireland, supplied from stock held at the ports of Tilbury, Liverpool and Grangemouth.

Centralising distribution at Chatteris brings the stock under Latham’s own roof. This will increase its ability to “have stock in the right place at the right time”, the company’s overriding objective.

The desire for more control was stoked by the company’s experience during and after the pandemic and the outbreak of war in Ukraine, when supply chains were chaotic for a while.

The drive for better service is the cornerstone of Latham’s strategy. All customers have a choice of suppliers. Latham wants to be the first one they come to.

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This service ethos is also embodied in the depot working hours, which operate 24 hours a day five days a week.

The NDC is self-funded from the windfall profits Latham received during 2022 and 2023, when shortages drove prices up and customers flocked to distributors that had stock or could still source it.

To my mind, Latham’s performance in those years was a demonstration of its competitive advantage. It had the financial resources and clout with suppliers to meet customers’ needs.

Big project

The £45 million NDC budget is large, nearly three times after-tax adjusted profit in 2026, and Latham has not said how long it will be before it pays for itself in incremental profit. It may drag on returns for some time. 

In rating the development as the only high-risk item in its risk report, the company acknowledges the vast warehouse might cost more to build or cost more to operate than it has budgeted.

Latham has spent about half its budget on land and staged payments, but it will probably be the end of calendar year 2027 before the NDC is fully operational. Currently, there is no indication of material additional costs, and the project is on schedule.

As for running costs, we will have to wait and see.

All being well, the NDC will allow Latham to stock a wider range and shuttle products around the country more efficiently, increasing the availability of high value products, and reinforcing its position as first-choice supplier.

In the short term though, the NDC is gobbling up cash and the so-far unproductive use of capital is diminishing return on capital. These factors were evident in 2026’s results.

2026: cost of investment

Revenue increased 7%, but adjusted operating profit fell 3% in 2026.

To judge profitability, I compare the current year with Latham’s 12-year averages, but I have excluded the windfall profits of 2022 and 2023 from the calculation because they may not be repeated.

Latham’s profit margin fell to 4%, slightly below the average. The company explains higher volumes of bulk sales through Lathams Direct Timber (LDT) reduced margins. LDT sells packs of timber and panels straight from the port to merchants.

The collapse of a large supplier also hit profit margins, probably because it flooded the market with stock at distressed prices.

Return on capital fell to 9%, significantly below the 12-year average. This was due to the 3% decline in returns (adjusted profit) and an 11% increase in capital employed. Some of the additional capital was due to the purchase of a freehold in Motherwell. Most of it was the half-finished NDC.

The company also bought stock ahead of demand, to protect against price increases when war broke out in the Middle East just before the year-end.

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These demands meant Latham spent more than it earned in cash terms, and its cash surplus shrank. The good news is the surplus is so large, the company’s finances should still be well in the black after the rest of the NDC budget is spent.

While Latham reports slight improvements in volumes and margins in the new financial year, it is experiencing significant price increases from suppliers due to increased energy, oil prices and freight costs.

Latham is largely passing price increases on to customers and at the AGM in July it reported a 10% increase in revenue in the first four months of the year, compared to the same period a year ago.

But running the NDC in before it is fully operational will weigh on profit.

Scoring Latham: long-term value play

I like James Latham. The business is not complicated, but the financial discipline of upfront investment would be hard to emulate. It sacrifices profit and cash flow now for returns over the long term. Responsibly sourced timber is a natural and environmentally sustainable material.

No doubt Latham’s investment-led ethos stems from family ownership. It was established in 1757 to import furniture and hardwood from America. Chair Nick Latham is an eighth-generation descendent of the founder. Four family members including the chair own holdings of more than 3%. Together, they own almost 15% of the shares.

Latham does not publish employee retention statistics but some depot directors have been with the company for decades. The promotion of former depot director Nick Widlinski to the main board in 2026, may demonstrate a preference for nurturing talent.

Endearingly, Latham routinely thanks staff in its annual report. This year it was the turn of the credit control team, who “have done a fantastic job” granting credit to customers while maintaining a very low bad debt figure (0.1% compared to a budget of 0.4%).  

The company prides itself on sourcing from sustainably managed forests. Unlike concrete and steel, timber is a renewable resource that locks carbon away as it grows. Although the production, transportation and storage of timber products creates emissions, Latham measures them and it measures its confidence in the measures. By providing the data to customers, Latham says it is encouraging low-ranked suppliers to improve their reporting.                                              

The 2026 annual report highlights Valchromat, which is used for displays and plinths in galleries and museums. It is a reusable zero-waste system made from a dense MDF finished with organic dyes and bonded with a special resin that produces crisper edges.                                                         

30 Shares for the future

Here is the ranked list of Decision Engine shares. I review the scores at least once a year, soon after each company has published its annual report. The price scores are calculated using the share price prior to publication.

Generally, I consider shares that score more than 5 out of 10 to be worthy of long-term investment in sizes determined by the ideal holding size (ihs%).

Games Workshop Group (LSE:GAW), Jet2  Ordinary Shares (LSE:JET2) and Cohort (LSE:CHRT) have published annual reports and are due to be re-scored. 

Click on a share’s score to see a breakdown (scores may have changed due to movements in share price). Key: qual is the share’s score out of 9 for the three quality factors (capabilities, risks, and strategy), price is the price score from -3 to +1, and ih% is the suggested ideal holding size as a percentage of the total value of a diversified portfolio.

Richard Beddard is a freelance contributor and not a direct employee of interactive investor.  

Richard owns James Latham and many shares in the Decision Engine. He weights his portfolio so it owns bigger holdings in the higher-scoring shares.

For more on the Decision Engine and Share Sleuth, please see Richard’s explainer.

Contact Richard Beddard by email: richard@beddard.net or on Twitter: @RichardBeddard