Share of the week: Odds of further upside

A debate in the office about which companies to cover Wednesday involved Diploma, then up 8% on an in-line trading update. As a company we hadn't covered previously, it looked ripe for an introduction to readers.

However, further digging revealed it was a stock we'd covered in exactly the same slot after an equally impressive year-end statement a year earlier!

And there are similarities between the two statements published 12 months apart. "Robust" is clearly a buzzword at Diploma HQ from where the firm supplies technical products and services to the life sciences, seals and controls industries.

Trading at around 900p a year ago, the stock had climbed to a then record high of 1,050p by the end of 2016. Further "robust" performance, alongside the April acquisition of Australia and New Zealand-focused Abacus, saw the share price hit 1,187p by early May.

Subsequently, shares weakened and made a seven-month low Tuesday. It made chief executive Bruce Thompson's profit-taking in mid-June look like great timing. The long-standing boss pocketed almost £2 million from a stake sale at 1,115p. Finance director Nigel Longwood also sold, trousering £836,000 for himself.

But the stock was back at 1,110p Wednesday as chiefs told how revenue for the year ending 30 September 2017 is expected to increase by around 17%. Strip out favourable currency effects plus the impact of acquisitions and organic revenue growth should still be a respectable 6%.

Diploma's Life Sciences division, which supplies the healthcare and environmental industries, should see annual revenue growth of 3%; its machinery division and Diploma's biggest profit generator, Seals, will see an increase of 4%; and revenue from Controls, the wiring and control devices operation, will jump 13%.

Operating margin remains stable, while a balance sheet expected to hold net cash in excess of £20 million could bankroll further acquisition opportunities that crop up.

Share price gains have held up post the announcement, giving a near-7% gain for the week.

Analysts like the company, but views differ slightly. Numis analyst Julian Cater reckons Diploma shares are worth 10% more at 1,190p and upgrades his rating to 'add'.

The counter argument comes from RBC's Andrew Brooke, though he admits to liking Diploma for its strong positions in niche markets, continued high returns and the ability to augment underlying growth with bolt-on in-fill deals.

That said, a forward price/earnings (PE) ratio of 20 times is "up with events and already discounting further acquisition potential", so a 'neutral' rating and target of 1,020p is the call.

Diploma is a 12-bagger since dipping below the £1 mark in the depths of the financial crisis back in 2009. A few pullbacks before a further surge higher seems quite typical, so a 10% correction over the past four months is not necessarily reason to panic.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.