The Diploma share price dips despite strong revenue growth. Time to buy?

Diploma is a quality company, but it usually comes with a share price to match. So is the decline after the latest trading update too good to miss?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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.

Chances to buy shares in quality businesses at good prices don’t come around often. But the Diploma (LSE:DPLM) share price just dipped after the company’s latest trading update.

Created with Highcharts 11.4.3Diploma Plc PriceZoom1M3M6MYTD1Y5Y10YALL18 Jul 201918 Jul 2024Zoom ▾Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '242020202020212021202220222023202320242024www.fool.co.uk

The company is still growing impressively and the outlook for the year is unchanged. So is the slight downturn in the stock a buying opportunity for investors?

Should you invest £1,000 in Diploma Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Diploma Plc made the list?

See the 6 stocks

Company overview

Diploma is a distributor of industrial components. More accurately, it’s a collection of smaller subsidiaries that supply these products.

The company differentiates itself from other distributors by offering a value-added service. It provides bespoke solutions for its customers. 

Growth for it comes from two sources. The first is acquiring new businesses to add to its network and the other is by growing its existing subsidiaries.

Over the last decade, this has proved a powerful combination. The firm has grown revenues at 15% per year and earnings per share at 11%. 

Strong growth

The latest update indicates that things are going pretty well on both fronts. The headline is that revenues have grown 13% over the last nine months. 

Around 10% of this has come from the company’s acquisitions and growth in existing businesses generated another 6%. Changes in exchange rates brought this down by 3% to 13% in total. 

Diploma also reported the smooth integration of its latest acquisitions, including Peerless Fasteners from earlier this year. As a result, margins came in as expected.

The result was in line with management’s guidance for the year. And the company is forecasting similar growth in revenues, with earnings per share set to increase by 15%. 

Growth and value

Diploma is a high-quality company. Its competitive position is difficult to disrupt and its ability to keep making acquisitions should give it scope to keep growing at a good rate in the future.

With this type of business, the biggest risk is often the possibility of overpaying for a subsidiary. This can be destructive to shareholder value. 

Diploma’s management has an excellent record in this area, though. And I think it could be a while until the company finds itself in a position where it’s short of attractive opportunities.

In my view, the bigger issue is the fact the stock trades at a price-to-earnings (P/E) ratio of 49 (or 29 based on the adjusted EPS that Diploma measures in its updates). A great business can be worth a high price tag, but that is a lot to pay for any company.

A buying opportunity?

The Diploma share price is falling slightly after the latest news, but the stock is still up 39% over the last 12 months. The firm’s ability to keep growing has been impressive and I expect this to continue. 

I used to own the stock in my portfolio, but I sold it just over a year ago at £28.18. The main reason was that I thought it was overvalued. 

That’s proved to be a mistake, but I don’t think buying it back at £42.08 is the way to undo that. So I’m going to keep my eye on the shares but look for a better opportunity elsewhere for now.

But there may be an even bigger investment opportunity that’s caught my eye:

Investing in AI: 3 Stocks with Huge Potential!

🤖 Are you fascinated by the potential of AI? 🤖

Imagine investing in cutting-edge technology just once, then watching as it evolves and grows, transforming industries and potentially even yielding substantial returns.

If the idea of being part of the AI revolution excites you, along with the prospect of significant potential gains on your initial investment…

Then you won't want to miss this special report inside Motley Fool Share Advisor – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And today, we're giving you exclusive access to ONE of these top AI stock picks, absolutely free!

Get your free AI stock pick

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

artificial intelligence investing algorithms
Investing Articles

Up 272% in just a year, is Palantir stock just getting started?

This writer recognises that Palantir has grown its business very well -- but does the stock price offer him an…

Read more »

Runner standing at the starting point with 2025 year for starting in new year 2025 to achieve business planing and success concept.
Investing Articles

Up 50%? The Aston Martin share price forecast is mind-blowing! 

If analysts are right, the Aston Aston Martin share price could absolutely rocket in the year ahead. Harvey Jones says…

Read more »

Investing Articles

As the S&P 500 drops, here are 2 Stocks and Shares ISA holdings I’m watching

Our writer has different views on how President Trump's tariffs might affect these two US holdings in his Stocks and…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

£10,000 invested in Tesla stock at Christmas is now worth…

Tesla stock has been one of best-performing investments of the past decade. But things haven't gone to plan for investors…

Read more »

Investing Articles

Up 279% in 5 years, could Meta stock keep soaring?

Meta stock has more than tripled in five years. This writer sees lots to like about the business but also…

Read more »

Pink 3D image of the numbers '2025' growing in size
Investing Articles

25% total return in a year? Is now the perfect time to buy BP shares?

BP shares are on the front line of today's global economic and political uncertainty but analysts think they can still…

Read more »

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

With Cash ISA changes coming, could now be the time to consider buying shares?

Changes to the Cash ISA could lead to greater investment in the stock market. This could be a good thing…

Read more »

Investing Articles

These FTSE 100 dividend shares just got cheaper, thanks to President Trump!

Investors buying dividend shares can lock in bigger long-term yields when share prices take a tumble. These two just did…

Read more »