The Diploma (LSE: DPLM) share price is forecast to grow by only 1.79% over the coming 12 months as analysts’ price targets weaken.
A few weeks back the price slumped 9% after it posted its full-year 2024 results. Despite a 14% increase in revenue and 15% earnings growth, the performance fell below shareholders’ expectations.
Diploma had enjoyed earnings per share (EPS) growth of upwards of 25% year on year since 2021. This year was only 3.63%. Revenue growth has also been steadily declining for the past four years, down from 46% in 2021.
Should you invest £1,000 in Smiths Group 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 Smiths Group Plc made the list?
The lacklustre performance comes after the share price climbed 135% in the past five years and 32% this year alone. But after peaking at £46.32 in mid-September, growth has tapered off. Admittedly, it rapidly recovered from last month’s dip but has done little since.
One positive is that it increased its final dividend to 42p per share. But compared to the £45 share price, it’s barely worth mentioning, equating to a yield of only 1.32%.
So why am I still optimistic about the stock?
Strong defensive credentials
Diploma is one of my favourite defensive stocks, despite not typically being considered in that category. While it does experience occasional volatility during rough times, it’s surprisingly resilient. That makes it a good option when aiming not only for long-term growth but stability too.
And it does have a history of growth.
The price is up almost 5,200% in the past 30 years, representing annualised growth of 14.15% per year.
What makes it interesting is the diverse range of sectors and industries it operates across.
As a UK-based industrial group, it provides specialised technical products and services across three main sectors: Life Sciences, Seals, and Controls. It also operates globally, including in North America and Continental Europe, serving industries such as healthcare, laboratory research, and industrial engineering.
Its competitors are disparate, each operating in their specific industry, such as Howden Joinery, Dechra Pharmaceuticals and Halma. Buying out smaller competitors is how Diploma grows but this also presents risk. If it overpays for acquisitions or they fail to perform, it could lose money.
Valuation
The stock appears overvalued right now, with a trailing price-to-earnings (P/E) ratio of 47.6. With earnings forecast to increase 39%, this could drop to 36.2. However, that would still be well above the industry average of 14.
This may be one reason why analysts don’t expect the growth of previous years to continue. The average 12-month price target is around £47 — barely any change from today’s price.
I’ll admit, it’s a disheartening forecast, considering the stock has done so well thus far. However, I remain optimistic about its long-term potential and defensive capabilities. It operates in a niche market, offering a diverse range of products with varying degrees of demand.
As part of a long-term portfolio aimed at retirement, I will continue to hold my Diploma shares but don’t plan to buy more today. However, I expect it will resume the steady growth it’s known for in 2026 and beyond.
