Diploma: Strong Growth Prospects and Balance Sheet Support Premium Valuation
The FTSE 100's recent surge to record highs typically warrants caution against buying at the market peak. However, Questor believes the index has further potential due to the intrinsic value of many constituents.
Valuation and Growth Potential
Diploma, a supplier of specialist technical products with significant international exposure, trades at a P/E ratio of 30.2. While this premium reflects the company's strong financial performance, it is justified by its growth prospects.
The company's earnings have grown at an annualized rate of 16% over the past 15 years through organic growth and strategic acquisitions. Its recent acquisition strategy has boosted revenue while organic sales remain solid.
Financial Strength
Diploma's balance sheet supports continued growth. Its net gearing ratio of 56% and net interest cover of 10.6 suggest ample borrowing capacity for future acquisitions.
First-Quarter Performance
The company's recent trading update showed a 12% increase in sales, driven by a 7% organic growth. It remains on track to meet financial guidance for the full year, with acquisitions expected to add to organic sales growth.
Competitive Advantage
Diploma's strong market position is evident in its return on equity of 22%, achieved with relatively low debt. This competitive advantage supports its premium valuation.
Conclusion
Despite its recent surge, Questor believes Diploma's growth prospects and financial strength justify its premium valuation. The company's sound long-term track record, solid balance sheet, and exposure to growing economies provide ample room for further capital appreciation.
Recommendation: Buy