In a week when Meta Platforms has been working out how to sublet its data centres, one FTSE 100 stock’s been quietly insisting the picks-and-shovels trade is alive and well.
Diploma (LSE: DPLM) — which has turned £10,000 into roughly £24,000 over five years — issued its Q3 update this week, and it reads like a company that hasn’t heard the AI-capex doubters.
Another quarter, another upgrade
Nine-month organic revenue growth hit 15%, led by Peerless (aerospace fasteners) and Windy City Wire (low-voltage cabling). Full-year guidance rose for the second time this year:
| FY26 guidance | Previous | New |
|---|---|---|
| Organic revenue growth | 12% | 14% |
| Operating margin | c.25% | c.26.5% |
| Operating profit growth | — | c.42% |
That’s a 7% upgrade to the £454m consensus for adjusted operating profit on Diploma’s own analyst consensus page. That figure was only updated on 9 June and it’s already obsolete.
The company’s staying on the case with acquisitions as well. It recently acquired CDM – a US defence interconnect business – maintaining its focus on markets with promising long-term prospects.
A 140% five-year gain doesn’t mean the stock can’t keep going up. A look at the stock’s five-year chart shows the danger of being too quick to think it must be done now.
Rolls-Royce, up 33% this year after rallying 1,100% since the start of 2023, is another example. So is it too soon to think the time to buy Diploma shares has passed?
The Halma warning
The catch is that fellow FTSE 100 serial acquirer Halma also reported record results recently. Unlike Diploma, the firm’s shares are now 24% below their June highs.
Investors discovered a single data-centre photonics customer (rumoured to be Alphabet) supplies 20% of group revenue and roughly half its organic growth. That kind of concentration’s an obvious risk.
Diploma has no customer like that. But there’s concentration at the end-market level. Aerospace, defence, and data centres are doing a lot of the heavy lifting in the firm’s recent impressive results.
Given this, Meta’s move to start selling excess computing power is an early sign that data centre building might be slowing. And that’s a threat to the demand for low-voltage cabling.
The valuation issue
At around 6,775p, the stock trades at 27 times this year’s consensus adjusted EPS of 236.9p. That isn’t outrageous, but it also isn’t cheap by any stretch of the imagination.
At that level, I think the stock’s priced for sustained double-digit growth. But the awkward detail is Diploma’s own financial model, published on its website. This guides for just 5% organic sales growth over the long term. In other words, it looks like the recent results are unusual, not the new normal.
Buying shares in a company growing at 5% at a price-to-earnings (P/E) ratio of 27 looks risky to me. At the very least, it puts a lot of pressure on Diploma’s future acquisitions.
My verdict
Diploma’s a superb business. It’s disciplined, cash-generative, and upgrading guidance while others seem to be under pressure. Those are the kind of things that make for great long-term investments. But at this multiple, with cyclical end markets looking unusually strong, I think it looks risky.
At today’s prices, I wonder whether the better opportunity might be Halma. That’s definitely something to think more carefully about.
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Stephen Wright does not own shares in any of the companies mentioned.
