Good investments don't have to be exciting. Shares of family-controlled timber group James Latham (LSE: LTHM) have risen by 198% over the last five years, and by 1,316% since September 2000.
This £167m company may not have shown up on your radar before, but today's final results suggest to me that the stock continues to offer potential value for new buyers. Sales rose by 6.9% to £198.8m last year, while operating profit was up 7.6% to £14.2m. The total dividend was increased by 7.3% to 15.7p.
Latham's accounts are refreshingly simple. Unlike those of so many companies, they aren't packed with adjusted items or 'what-if' pro forma figures. What you see is what you get, and in this case I think it's very attractive.
Operating margins were stable at 7.1% last year, and the group generated a return on capital employed of 15.1%. Both figures seem good to me, given the commoditised nature of most of the firm's products.
Although £6m was invested in new sites, free cash flow of £3.4m was still enough to cover the payment of £2.9m in dividends. Net cash rose slightly despite the heavy spending, up from £15.8m to £16.3m.
In my opinion, the main risk facing investors is that a UK recession could cause a slump in demand for timber. This share price would probably take a big hit.
There's no way to know how likely a recession is, but it's worth remembering that Latham has been in the timber trade since 1757. I'd argue that a future downturn would be a buying opportunity, not a reason to sell.
In the meantime, these shares trade on a P/E of 15, with a yield of 1.8%. I'd be happy to start building a long-term position at this level, with a view to averaging down during the next market crash.
The perfect business?
Travel and insurance group Saga (LSE: SAGA) may seem a dull business. But the group's focus on over-50s means that its customer base is expanding steadily as the UK's population ages. These customers are also among the most affluent in the UK, with high levels of home ownership and disposable income.
In a trading statement today, the group confirmed that trading so far this year has been in line with expectations. Analysts expect the group's earnings per share to rise by 4.3% to 14.8p this year. This puts the stock on a forecast P/E of 13.5, with a prospective dividend yield of 4.7%.
This level of growth may seem pretty average, but I believe Saga's focus on developing a closer relationship with its customers should deliver above-average profit growth over the medium term.
To get an idea of Saga's potential, it's worth considering last year's results. The group's operating margin hit a new record of 22.2%. This resulted in improved cash flow and allowed the firm to increase the full-year dividend by 18%, while still reducing debt.
Annual dividend growth is expected to remain around 10% over the next couple of years, offering shareholders the chance to lock in an attractive yield. In my view, this stock is probably undervalued at current levels. Saga could be a stock to buy and tuck away for the next 10 years.
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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.