Despite a recent stumble in its share price, Diploma (LSE: DPLM) is forecasted to only grow by 1.79% over the next year, a disappointing figure with weakening price targets from analysts. This downtrend follows a 9% drop after the announcement of its full-year 2024 results. Despite showing a 14% increase in revenue and 15% growth in earnings, it failed to meet shareholders’ expectations.
Diploma has historically enjoyed impressive earnings growth, but this year saw a significant decline with earnings per share (EPS) only at 3.63%. Revenue growth has been steadily decreasing over the last four years, dropping from 46% in 2021. The lacklustre performance comes after a notable share price increase of 135% in the last five years and 32% this year alone.
Although the stock saw a rapid recovery after last month’s dip, the growth has plateaued following the peak in mid-September. Despite this, there is a positive aspect in the increased final dividend to 42p per share, even though it doesn’t amount to much compared to the current share price, yielding only 1.32%.
However, there are reasons to remain optimistic about Diploma’s potential.
Strong Defensive Credentials
Diploma stands out as a favourite defensive stock, offering resilience during turbulent times, making it a reliable option for long-term growth and stability purposes. Despite occasional volatility, Diploma has proven its strength in the market with nearly 5,200% growth in the past three decades, representing an impressive annualized growth rate of 14.15% per year.
The company’s diverse range across multiple sectors including Life Sciences, Seals, and Controls, operating in various regions globally, provides a stable foundation for growth. Despite competition from industry players like Howden Joinery and Dechra Pharmaceuticals, Diploma’s strategic acquisitions of smaller firms have positioned it well, but it does come with inherent risks.
Valuation
The stock currently appears overvalued with a high trailing price-to-earnings (P/E) ratio of 47.6, significantly above the industry average of 14. However, predicted earnings growth of 39% could potentially reduce this ratio to 36.2, albeit still above the industry norm. Analysts are cautious about the future growth potential of Diploma, with the average 12-month price target indicating minimal change from the current price.
Despite these challenges, Diploma remains an attractive long-term prospect, especially for retirement portfolios. The company’s niche market presence and diverse product offerings suggest the potential for steady growth in the coming years. As an existing shareholder, holding onto Diploma shares may be prudent, anticipating the resumption of its historical growth trajectory beyond 2026.
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