Shares in services company Diploma (LSE: DPLM) have fallen by over 8% today after it released a disappointing update. It stated that growth in the first three quarters of the year had been somewhat sluggish as a result of a slowdown in activity in the oil and gas industry. This means that, excluding the effect of acquisitions and currency fluctuations, its revenues for the full year to the end of September are expected to be just 1% higher than last year.
A key reason for this is cutbacks in the oil and gas sector, which has impacted Diploma’s North American seals business. Furthermore, demand for HKX’s excavator attachment kits has declined versus a very strong prior year. In addition, Europe continues to offer relatively low levels of demand, while a facility closure and relocation in the US seals business means that full-year operating margins are now expected to be 0.5% below previous guidance.
Separately, Diploma also announced the departure of its COO, Iain Henderson, who will leave in the first quarter of 2016. His responsibilities are due to be apportioned among existing management, with a direct replacement not set to be appointed.
Clearly, Diploma’s update has disappointed investors and, looking ahead, the company’s share price could come under further pressure. That’s because, while it has an excellent track record of growth, with its bottom line having increased at an annualised rate of almost 20% during the last five years, it is expected to deliver growth of 7% this year and 8% next year. As such, its current price to earnings (P/E) ratio of 17 appears to be somewhat high given its near-term outlook.
That’s especially evident when comparing Diploma’s rating to that of Sainsbury’s (LSE: SBRY). The latter may be struggling to a greater extent than the former, with the UK supermarket sector still enduring a hugely difficult period. But, Sainsbury’s trades on a P/E ratio of just 11.1, which indicates that there is significant upward rerating potential.
Clearly, Sainsbury’s lacks growth appeal, with its earnings due to fall by 1% next year. However, its new pricing strategy should help to stabilise margins moving forward, as it seeks to tap into the increasing disposable incomes (in real terms) that people across the UK are presently enjoying. In other words, Sainsbury’s is seeking to establish itself as a mid-tier operator, having been focused on competing on price in the last few years.
Meanwhile, online fashion retailer Boohoo.Com (LSE: BOO) continues to make excellent progress after a disastrous period following last year’s IPO. Having traded as high as 75p per share following its listing in March 2014, Boohoo.Com plunged to a low of 22p in January of this year. Since then, it has gradually risen to its current level of 30p and, looking ahead, more gains could be to come.
A key reason for this is that the company remains relatively cheap. Its P/E ratio may stand at 28.5 but, with earnings set to rise by 25% next year, it trades on a price to earnings growth (PEG) ratio of just 0.9. Furthermore, with Boohoo.Com having a debt-free balance sheet, diverse geographical exposure and a considerable amount of customer loyalty, it appears to have a very favourable risk/reward ratio.
However, while Boohoo.Com is a very appealing investment opportunity, Sainsbury’s ultra-low valuation, sensible pricing strategy and scope to directly benefit from improving UK consumer confidence mean that it appears to be the best buy of the three stocks.
