I think investors looking to build wealth should consider buying stock in Diploma (LSE:DPLM). The FTSE 100 industrial distribution conglomerate is a growth machine that shows no sign of slowing down.
Over the last five years, the stock is up 160%. And even with the stock at an all-time high, I think there’s a very good chance there’s more to come from the company.
How does it do it?
Over the last five years, Diploma has seen its revenues increase by 147%, operating income grow 150%, and dividend rise by 129%. And that’s during a period of pandemic, inflation, and recession.
In theory, those macroeconomic challenges should have stalled the company’s growth – or at the very least, slowed it down. But there’s been relatively little sign of that, so what’s the secret?
Diploma’s growth comes from two sources. The first is acquiring other businesses and the second is integrating them into its existing operations to make them more efficient and increase their earnings.
This strategy can be risky – overpaying for an acquisition can destroy value for shareholders. But as the latest news this week indicates, Diploma doesn’t seem to be in much danger of that.
Peerless Fasteners
Peerless Fasteners manufactures nuts and bolts for the aerospace industry. As of this week, it’s also Diploma’s latest acquisition and – in my view – perfectly demonstrates what the company does best.
The FTSE 100 firm already has a strong presence in seals and components and this acquisition adds to that. And its distribution gives Peerless scope to expand its presence in markets outside the US.
Arguably, though, the most impressive thing about the deal is the price. Diploma is set to pay around seven times next year’s earnings – for a company growing at 9% per year by itself.
In my view, that’s almost unbelievably good. And it goes some way towards addressing the concern that it might start overpaying for acquisitions as a result of running out of opportunities.
Valuation
The market responded positively to the acquisition news and it’s not hard to see why. But the company’s own shares aren’t cheap at a price-to-earnings (P/E) ratio of 42.
It’s a fair point that buying anything at that kind of multiple is a risk and Diploma is no exception. The company will need to grow and investors are going to have to wait for returns from the business.
I’d be very hesitant to use that as a reason to not consider buying the stock, though. Five years ago, it traded at a P/E ratio of 33 and ignoring it then would have been an expensive mistake.
No company can grow at a rapid rate indefinitely – after a while, size becomes an obstacle. But with a market cap of £5bn, it’s going to be a long time until Diploma runs into the law of large numbers.
ISA deadline
The deadline for investing in a Stocks and Shares ISA before the new financial year is 5 April. I think investors with any of their contribution allowance left should look seriously at Diploma shares.
The company itself has shown an enduring ability to power through difficult macroeconomic environments. And its latest acquisition epitomises everything that the business does well.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
