Diploma stock tumbles despite solid results and confident outlook

A record-breaking run at Diploma has propelled the little-recognised industrials group into the FTSE 100 yet investors reacted poorly to the latest results amid a tougher environment.
Diploma, a supplier of industrial components which has a market valuation of more than £6 billion, sells cabling, seals, hoses, fasteners, as well as equipment and disposables for the pharmaceuticals sector. Its business model is predicated on the gear it distributes being niche and specialised, making it hard for customers to go anywhere else to source it.
For its financial year to the end of September, Diploma reported a 14 per cent growth in revenues to £1.36 billion with a little over half of that coming from acquisitions.
On that it reported a 20 per cent increase in operating profits to £285 million as its margin rose 120 basis points to 20.9 per cent. Shareholders are to get a 5 per cent increase in the dividend to 59.3p.
Looking forward through the current financial year, the company, which employs 3,600 people around the world with half of its operations now in the US, said it expected its like-for-like or organic growth to increase by 6 per cent, in line with the year just gone.
Net additional revenues from acquisitions allowing for disposals, though, would probably only add another two percentage points, the company said. Even so, profit margins are set to further edge up to 21 per cent.
Johnny Thomson, Diploma’s chief executive, said even if “some markets have been a little tougher this year”, all that added up to “a strong performance”.
The market, however, appeared to disagree and the shares closed down 8 per cent, or £3.62, to £41.74.
Analysts, while generally scratching their heads as to why the rerating of Diploma’s stock appeared to be so brutal, indicated that the shares had enjoyed a spectacular run and if investors were waking up to what Thomson reiterated as a “tougher environment”, so be it.
The shares in trading in the hours after the results announcement, on Tuesday morning, were down £3.40 to £41.96. A year ago the shares were at £30 and two years ago at £23, having gone into the pandemic in early 2020 at £21. When Thomson joined the company from the foodservice group Compass in 2019, the shares were at £13. Ten years ago they were trading at £7.
City sources said there had been no surprises and that the figures reported were in line with expectations. That in itself may have been the issue, it was said, as investors have become used to Diploma surprising on the upside and guiding to upgrades in forecasts.
Akhil Patel, an analyst at the broker Shore Capital, said he was switching from a “buy” to a “hold” because of “conservative” earnings growth forecast compared with the run rate of the past three years, and because “we see current valuation metrics as full”.