I’m looking for UK shares to buy in March. And there’s a FTSE 250 stock that is catching my eye at the moment.
The stock is Diploma (LSE:DPLM). The business has strong cash generation, a wide economic moat, and promising growth prospects.
The company reminds me a lot of Warren Buffett’s Berkshire Hathaway (NYSE:BRK.B). The similarities are striking, but I think that Diploma has one big advantage over Buffett’s company.
Conglomerates
Both Diploma and Berkshire are conglomerates. In other words, they are collections of smaller businesses.
Conglomerates grow their earnings in two ways. One is by their existing businesses making more money and the other is by acquiring other businesses.
The secret to Buffett’s success over time has been buying quality businesses at reasonable prices. And that’s exactly the approach the Diploma takes.
Diploma focuses on buying companies with low capital requirements and strong competitive positions. Importantly, it also places a heavy emphasis on not overpaying for acquisitions.
As Buffett says, the strategy is simple, but it isn’t easy. Finding businesses to buy has been a challenge for Berkshire over the past few years.
Importantly, though, Diploma has a key advantage when it comes to acquiring good businesses at reasonable prices. And that advantage comes from its size.
Size
The risk of overpaying for an acquisition is one of the biggest dangers for a conglomerate. Even the best business can be bad investment at the wrong price.
This is where Diploma has a big advantage. Being less than 1% of Berkshire’s size reduces the likelihood of it having to overpay in order to make an acquisition.
Buffett has said repeatedly that the main difficulty for Berkshire going forward is its size. It’s hard to find an investment big enough to make a difference to a $667bn company.
Diploma, on the other hand, has a much smaller market cap of around £3.4bn. That means acquisitions too small for a company the size of Berkshire can still be significant.
In other words, Diploma has opportunities available that aren’t worthwhile for companties the size of Berkshire. And less competition reduces the risk of having to pay an inflated price.
A stock to buy
I own Diploma shares in my portfolio. Since the start of the year, the stock is down 2%, compared to a 3% gain for the FTSE 250.
I think that the drop in the company’s share price is a great buying opportunity. The underlying business looks to me like it’s in really good shape.
The nature of Diploma’s business means it has low capital requirements. As a result, around 88% of the cash generated through its operations becomes free cash available to shareholders.
Diploma’s revenue grew by 30% in 2022, through a mixture of organic growth and new businesses. More importantly, management stated that its pipeline for acquisitions looks strong.
If I had to invest 100% of my net worth into a FTSE 250 stock, I’d choose this one. I’m glad I don’t, but it’s top of my list of stocks to buy in March.
