Why the Diploma share price is surging after a strong trading update

The Diploma share price is up 7% after a strong earnings report. As the company keeps growing, is there still a buying opportunity for investors?

| More on:
Abstract bull climbing indicators on stock chart

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Diploma (LSE:DPLM) share price has gone from £15.09 to £41.94 over the last five years. That makes it one of the FTSE 100’s best-performing stocks.

The business has been a compounding machine, but the question for investors is whether it can continue. And its most recent trading update indicates the company isn’t slowing down.

Growth, growth, and more growth

Diploma reported strong growth across the board in the six months leading up to the end of March. And management is expecting more to come by the end of the year.

Organic sales grew 5%, operating margins widened to 19.6% and cash conversion reached 76%. As a result, earnings per share reached 65.1p and free cash flow increased to £66.3m. 

Diploma Half-Year Results to March 31 2024

Source: Company Report

Importantly, each of the firm’s three divisions reported higher revenues. Against a weak backdrop of consumers looking to use up their existing inventories, this was impressive. 

More impressive, though, is the forecast. Management is expecting organic sales to grow, margins to widen, earnings per share to increase, and free cash flow conversion to improve.


Organic growth is only part of Diploma’s success though. Acquiring other businesses has been a key source of higher revenues. 

This is the riskier part of the company’s strategy. Expanding in this way depends on finding enough opportunities at attractive prices, which gets harder as the firm grows.

Diploma’s update is encouraging, however. The business announced 12 deals over the last six months and reported that its pipeline for future acquisitions looks strong going forward. 

On top of this, the company is focusing on finding value. Its transactions are coming in at low multiples and the firm’s focus on returns on capital helps it avoid overpaying.


The biggest risk with Diploma shares – in my view – isn’t the danger of acquiring badly. It’s the share price – a price-to-earnings (P/E) ratio of 45, has a lot of growth already priced in.

That implies a 2.2% earnings yield. Even with a 90% cash conversion rate, this still looks low compared to the 4.1% yield a 10-year UK government bond currently comes with.

In order to match up, Diploma will have to grow at an average of around 12% per year for the next 10 years. There’s a risk it might not achieve this, which would be bad for shareholders.

Yet the latest report implies the company is on track. And investors need to be confident the current growth can continue for another decade to consider buying the stock.

A stock to buy?

It’s no surprise Diploma has been one of the FTSE 100’s best-performing shares over the last five years. The business has been firing on all cylinders and looks set to continue. 

The stock doesn’t come cheap. But if the company can stay on its current path for another 10 years or more, it could be a terrific investment even at today’s prices.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stephen Wright has no position in any of the 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.

More on Investing Articles

Photo of a man going through financial problems
Investing Articles

2 dividend shares I’d avoid like the plague in today’s stock market

The UK stock market is full of high-yield dividend shares that could equate to a steady stream of passive income.…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

£17,000 in savings? Here’s how I’d aim to turn that into a £29,548 annual second income!

Generating a sizeable second income can be life-enhancing and can be done from relatively small investments in high-dividend-paying stocks.

Read more »

Investing Articles

With as little as £300 a month invested, this stock could net £16,000 a year in passive income

Putting a few hundred pounds each month into the stock market could eventually generate a five-figure annual passive income, this…

Read more »

Black woman using loudspeaker to be heard
Investing Articles

This dividend stock could pop next week!

This dividend stock happens to have one of the biggest dividend yields I've come across -- 10.7% -- but I'm…

Read more »

Investing Articles

Up 81%, can this FTSE 100 turnaround share keep surging?

This recovering retailer has been one of the FTSE's greatest performers over the past year. Royston Wild considers whether it…

Read more »

Happy couple showing relief at news
Investing Articles

£10,000 in savings? I’d buy 4 passive income shares to target a £100 per week second income!

By buying passive income shares today, I have a great chance to eventually make life-changing wealth. Here's how I'd invest…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

I think this may be an unmissable chance to buy an oversold UK share before it rallies hard

Harvey Jones piled into this beaten down UK share because it looks cheap and offers a sky-high yield. Now he's…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

How I’d invest £500 a month in shares to target a £29,000 second income

Investing in shares is a tried-and-tested way to build a second income. Our writer explains how he’d do it, starting…

Read more »