Image source: Getty Images
An unscheduled trading update has sent the Diploma (LSE:DPLM) share price surging. So could it be a great choice for investors to consider in an uncertain stock market?
Revenues and margins are set to come in ahead of expectations this year. But the question for investors is whether this is a short-term boost, or a sign of something more durable.
Explosive growth
Diploma has increased its organic sales growth forecasts from 6% to 9% for 2026. And it’s expecting operating margins to be around 25%, rather than 22.5%.
Together, those changes mean operating income is set to come in 14% higher than expected. That’s why the stock is moving higher and it’s worth noting where that growth is coming from.
Diploma is a collection of businesses focused on industrial distribution. It focuses on buying and improving other companies and two of its recent acquisitions are doing very well.
Windy City Wire is a supplier of low-voltage cabling for data centres. And Peerless Fasteners supplies aircraft components, where demand is strong as a result of higher defence spending.
Given this, it’s maybe the case that the stock market shouldn’t be surprised by upgrades to sales and profit forecasts from Diploma. But the latest news has caused a strong reaction.
The company clearly has key subsidiaries in the right place at the right time. But investors need to think about how long these demand levels are likely to remain elevated.
Right place, right time?
The risk with a company that’s in the right place at the right time is that things change. And the growth in the industries that are booming today might not last forever.
The Covid-19 pandemic is a good example. Companies like Croda International benefited from a surge in demand for lipids used in vaccine development and the stock surged as a result.
Unfortunately, that unusually high demand didn’t last forever. And elevated inventory levels built up during the pandemic meant the firm’s sales – and its share price – crashed afterwards.
The risk is that something similar might be true of Diploma. The strong demand coming from AI and higher defence spending might prove temporary, which makes buying today risky.
There is, however, a big reason for positivity. Both Windy City Wire and Peerless are fairly recent acquisitions, which is a sign the firm is still finding outstanding growth opportunities.
That means Diploma’s recent news isn’t just a result of being in the right place at the right time. It’s down to an enduring ability to find acquisition opportunities, which is a long-term positive.
Buy?
Buying a stock that’s up 19% in a day in a volatile stock market looks risky. Especially when it might be benefitting from some unusually high demand in cyclical markets.
From a long-term perspective, though, there’s still a lot to like about the stock – even at some high valuation multiples. A continued ability to grow is impressive and extremely valuable.
Given this, I think the stock is one to consider buying. There’s always a chance the share price might fall, but the stock might have gone up a lot more by the time that happens.
