Halma (LSE:HLMA) and Diploma (LSE:DPLM) have been two of the UK’s top-performing stocks over the last five years. And both of them reported earnings this week.
Both companies have similar business models – decentralised structures that support organic growth with acquisitions. But one in particular blew investors away with its recent results.
Diploma: a strong year
Diploma’s a collection of industrial distribution businesses. And the firm’s results for the 12 months leading up to 30 September were strong.
Revenues were up 12% with the majority of this coming from existing operations. This is something investors tend to view positively, due to the inherent risks with acquisitions.
Organic revenue growth of 11% was significantly higher than the 6% the company achieved in the previous year. But Diploma’s forward guidance is for 6% again in 2026.
Based on the firm’s adjusted earnings per share, the stock currently trades at a price-to-earnings (P/E) ratio of 30. That might seem like a lot for 6% organic revenue growth.
The company expects to boost this via acquisitions, but there’s always a danger of overpaying. It’s worth noting though, that the current management has an excellent record so far.
Some of its recent big deals – Windy City Wire and Peerless Fasteners – have been performing very well. So I think investors have a lot of reasons for optimism.
Halma: beats and raises
Halma has a similar structure, but the company’s made up of technology businesses focused on safety. And the firm was reporting its results for the six months leading up to 30 September.
Organic revenue growth came in at 16.7%, which is extremely high. On top of this, adjusted earnings before income and taxes were up 22.8% compared to the previous year.
Halma also raised its guidance for the full year. It expects growth to remain strong and this is a big part of why the stock was up 12.5% on Thursday (20 November) after the announcement.
The stock also trades at a high P/E ratio – around 35 based on the firm’s adjusted earnings per share figures. By itself, that’s not a problem, but it does mean expectations are high.
Halma flagged potential weakness in end markets and broader macroeconomic uncertainty as a risk. And the high valuation means this is something investors should take seriously.
The firm’s strategy involves buying businesses and helping them to grow. It’s been a good one in the past and the latest results suggest this is set to continue.
Resilience
Neither Diploma nor Halma is a cheap stock. To an extent, this is justified by the companies continuing to generate strong growth even in difficult trading conditions.
It’s tempting to think that investors who want to own these shares have to look past the valuation and just go for it. But I think this would be a mistake.
Even the best businesses go through difficult patches from time to time. And investors need to make sure they’re ready to seize opportunities when they present themselves.
For the time being, I’m keeping both stocks on my watchlist. But I’m aware that a chance to buy might show up when investors are least expecting it.
