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Diploma (LSE:DPLM) has been one of the FTSE 100’s top-performing stocks of the last five years. And it looks set to get even better.
That’s enough to turn a £1,000 investment into £23,959 and the latest update shows a business going from strength to strength. So, should investors think about buying?
Growth
Diploma reported 17% revenue growth in the six months leading up to the end of March. And wider margins meant earnings per share climbed 36%.
Beneath the surface, it’s clear where the growth is coming from. Here’s a breakdown of how much Diploma’s individual units grew by:
| Division | Organic growth |
|---|---|
| Controls | 26% |
| Seals | 2% |
| Life Sciences | 4% |
The Controls division distributes things like cables and fasteners. Those businesses are benefitting from some strong demand right now.
Increased defence spending has been driving demand for aerospace components. And data centre building has resulted in strong cable sales.
As a result, Diploma increased its forecast for the year and the stock went up. But is it the time to be greedy when others are fearful?
Risks and rewards
The risk with Diploma is obvious. It sells into cyclical end markets and if demand falters in either aerospace or data centres, growth could slow dramatically.
At a price-to-earnings (P/E) ratio of around 31, the stock could fall sharply if this happens. And it’s not as though this hasn’t happened before.
At the start of 2025, Diploma’s revenue growth slowed and the share price fell 20% in two months. That’s the risk of high multiples and cyclical industries.
Investors, however, might note that the stock is still up 47% from its previous highs. So, even buying at the wrong time has turned out well.
Does this give long-term investors a license to consider buying? I’m not so sure.
When to buy?
Diploma’s recent results are terrific, but I’m a little hesitant. I’m trying to work out how much of that is due to temporary factors.
The firm’s stated ambition doesn’t fill me with confidence. It’s aiming for 5% annual organic revenue growth. To my mind, that doesn’t justify the current P/E ratio. And aside from the Controls division, results were short of even that.
When the stock crashed last year, it was picked up by aerospace and data centre demand. But I don’t think that will last forever.
I’ve seen what happens when cyclical industries lose momentum. And that makes me wary of jumping in at today’s prices.
I could be wrong, but…
I used to own Diploma shares, but I sold them in 2023. The reason was simple – I was concerned about a high valuation and a possible downturn.
By the time the stock crashed, it was already up 75% from the price I sold it at. So it never fell back to that level.
What that means is that I don’t have perfect foresight as to when a downturn might come. But I’m not convinced anyone does.
Given that investors can’t know everything, the thing to do is to focus on what they can know. And I think that points in one direction.
Diploma is definitely a stock to keep an eye on. But my view is that there are more compelling stocks to consider buying right now.
Stephen Wright has no position in any of the companies mentioned.
