FTSE 250 stock Diploma (LSE:DPLM) soared by 9% on Tuesday morning. The jump came after the firm announced that full-year results were anticipated to “materially exceed” expectations after a strong contribution from acquisitions.
The specialist seals and controls maker’s share price was trading at a 25% discount over the last three months. The stock fell considerably in trading at the beginning of the year, having reached a peak of £35.04. At the time of writing, the stock is trading at £27.52.
Why did the share price jump today?
On Tuesday morning, the London-headquartered firm said that full-year results should “materially exceed” expectations. The company forecast that underlying revenue growth would be in the low double-digits and “well ahead of our model”.
“This reflects our expectation that growth will moderate in the second half, particularly as comparators become more demanding,” the company said in a trading update. Including recent acquisitions, reported revenue growth was expected to exceed 20%. Meanwhile, operating margin expectation was at the top end of its 18%-19% range.
“Our operating margin performance is very encouraging as we continue to navigate inflation, supply chain challenges and tight labour markets,” the firm added.
Diploma had been upbeat on growth despite a falling share price in recent months. In January, the company stated that its trading performance had been “strong” in the first quarter of the year. Underlying revenues were growing as all of its sectors started the year off well, it added.
Is Diploma a buy for my portfolio?
The firm has demonstrated impressive revenue growth in recent years. Since 2016, Diploma’s sales and net profits have grown at a compound annual rate of 16% and 13%, respectively. This growth has come on the back of organic increases in sales but also a fairly aggressive acquisitions strategy. During the financial year to the end of September, the group spent £456m acquiring 10 businesses. Diploma is still looking to grow but only when acquisition targets meet returns expectations.
However, previous growth is not indicative of future growth. And despite growth potential, the firm’s price-to-earnings (P/E) ratio — a metric for valuing a company that measures its current share price relative to its earnings per share — is 29.5 at yesterday’s closing price. To me that’s a little expensive.
Also, with only a 1.5% dividend yield, it’s not a great passive income stock to hold.
Diploma’s profitability could also be impacted by a number of things in the short-to-medium term. For example, higher interest rates could see repayments on the company’s debt increase.
I’m not buying Diploma stocks anytime soon, although I appreciate it could be one to watch. Yes, the company has demonstrated impressive growth in the past but I think it’s a little overvalued right now.
