Why FTSE 100 stock Diploma was just chased to record high

Quality compounder Diploma (LSE:DPLM) today hit a £7 billion valuation for the first time after its second big upgrade to full-year guidance in as many months gave a further lift to shares.

The group, whose annual earnings growth since 2009 has been an average 16%, only joined the FTSE 100 index in September 2023 but now sits among the top 60.

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It has grown through a strategy of buying quality small and medium-sized businesses with the potential to deliver strong returns across seals, controls and life sciences.

Diploma’s portfolio of businesses provide solutions that make customers’ lives easier, with the value created from this far in excess of the cost of the product.

A decentralised model means firms such as Chicago’s Windy City Wire, which makes premium low-voltage wire and cable, are able to deliver solutions for their customers in their own way.

Chief executive Johnny Thomson took over in 2019, overseeing Diploma’s doubling in size through organic growth and the acquisition of well over 30 strategically important businesses.

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More than half of 2024 revenues were from North America, where local supply chains have limited the impact of US tariffs. The company’s US businesses last year sourced over 80% of their products domestically and generated over 85% of their revenues in the US.

Source: TradingView. Past performance is not a guide to future performance.

Diploma issued another strong trading update today when it reported revenues growth of 10% on an organic basis for the nine months to the end of June. Morgan Stanley said the company had showcased its ability to deliver “best-in-class growth despite macro volatility”.

The performance means Diploma now expects growth for the year of 10%, up from 8% after an earlier upgrade from 6% at the time of half-year results in May.

It continues to see a strong operating margin in line with full-year guidance of 22%, having previously upgraded this estimate from 21% in interim results. It recorded 20.9% in 2024.

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Diploma also revealed today it has invested another £39 million on two “quality” acquisitions.

The addition of Haagensen has bolstered Diploma’s M-Seals business in Denmark, while Alpha Laboratories in life sciences marks the company’s entry into the UK vitro diagnostics market.

The shares rose 351p to a record 5,255p following the update.

Morgan Stanley, which has a price target of 5,550p, added: “We believe Diploma's track record of superior growth, margin and cash and returns profile warrants a premium to the distributor peer group.”

Counterparts at Stifel said the stock traded on a one-year forward price/earnings multiple of 28 times, which is broadly in-line with the five-year average and within the range of quality compounding peers.

The City firm added: “We see upside from further compound growth, with Diploma's financial performance in a subdued macro backdrop in recent years highlighting the strength of its model.”

Diploma’s largest division is controls, which supplies specialised wiring, cables, connectors, fasteners and adhesives for technically demanding applications.

The seals sector businesses supply a range of seals, gaskets, cylinders, components and kits used in heavy mobile machinery, while the smaller life sciences arm provides equipment, consumables and instrumentation to the healthcare industry.

Thomson has previously described the company’s decentralised culture that preserves local ownership but with an alignment to group objectives as “our secret sauce”.