Image source: Getty Images
Anyone who thinks the UK doesn’t have any good growth stocks should check out Diploma (LSE:DPLM). The firm’s been one of the FTSE 100’s leading lights over the last 10 years.
Revenues have grown almost 300% in the last decade and earnings per share are up 303%. So is the company starting to show signs of slowing down, or is there still an opportunity?
What Diploma does
Diploma’s a distributor of industrial components and equipment. Its strategy for growth involves buying other companies and helping them to grow their sales and profits.
In general, investors are typically more interested in growth from existing businesses (organic growth) over acquisitions. There are a few reasons for this.
One is that a company can only buy a business once. So for the growth that it generates isn’t going to be repeated unless the firm finds another acquisition opportunity the following year. Another is that acquisitions come with an inherent risk of overpaying. Investors generally think this isn’t the case with organic growth, which is why it’s the number the stock market focuses on.
The latest results
On Wednesday (14 January), Diploma issued its trading update for the three months leading up to 31 December 2025. And the report looked very strong. Organic growth was very strong, at 14%. But the firm also completed four acquisitions at what look like attractive valuations.
Diploma’s been paying prices that imply EBIT multiples of between 6 and 8. At that level, the company doesn’t have to generate much in terms of growth for them to work out well.
The firm also reports a solid pipeline of acquisition opportunities ahead. But investors should note that the outlook for the rest of the year is much more modest.
Guidance
In terms of the full year, Diploma’s expecting 6% organic revenue growth. In other words, the company thinks the second half of the year is likely to be much slower on this front. Furthermore, the firm’s own long-term target is 5% a year. That might be conservative, but it’s something investors need to factor into their projections for the business.
Based on Diploma’s adjusted earnings per share, the stock’s trading at a price-to-earnings (P/E) ratio of around 32. And that implies more than 5% in terms of revenue growth.
That also means a strong acquisition pipeline’s currently reflected in the share price. So while I expect the company to keep doing well, I think the stock’s probably fairly valued right now.
The next Diploma?
Diploma’s a quality company that’s staying on my watchlist. If slower organic growth in the second half of the year causes the share price to dip, I’ll be taking another look.
Right now though, I’m on the hunt for the next Diploma. There are a few UK companies looking to run a similar strategy and I think some of them look very interesting.
