As an investor with a vision for the long term, my buys lean more on the dull and banal than the flashy tech stocks splashed across the FT’s headlines that capture people’s imaginations. My favourite shares are very much bland, solid entities that deliver good returns without being the next Apple. More Crystal Palace than Manchester City. The FTSE 250 possesses such shares in abundance.
My pick of the bunch very much fits this characterisation. Diploma (LSE:DPLM) is a specialist component manufacturer and distributor with a large UK and overseas presence. It makes and ships implements like valves and pipes across the globe for industries such as life sciences.
Its share price is currently down 1.95% over the past five days, as is the overall FTSE 250 index (-1.05%). Indeed, the fate of the two seem linked. Since Brexit and the current British political instability, investors have turned their noses up at FTSE 250 assets. This is somewhat unfair, as they are far from financially underperforming by and large. Diploma is a glittering source of value amid this shamefully overlooked exchange.
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Hidden value
The company has remarkably strong financial fundamentals, giving me much confidence that it will weather the coming economic storms. Despite supply chain chaos and inflation, it is poised to deliver a low double-digit increase of revenue. That this will swell its coffers is demonstrated by the fact that its operating margins are up by 0.2%. This is because it managed to pass on inflationary costs to its consumers, thus insulating it from the scourge of price increases that frequently eat into businesses’ bottom lines.
It also has a low debt-to-earnings ratio — its borrowing costs are covered 10x by its profits, giving it much financial headspace should it run into trouble. Therefore, at the very least it is a reliable store of value at a time when are savings are eroded by inflation. That in itself is valuable, but that is not why I wrote this article.
In my mind, Diploma will emerge from bitter economic conditions in better shape than it is now. This is because of its aggressive growth strategy. Diploma has achieved this by ruthlessly snapping up competitors or suppliers. It acquired 10 companies last year and three so far this year. Its range of services mean that its list of potential companies to buy is very long.
As competitors wilt, Diploma’s sound finances could enable it to buy them at cut-price deals. Its low debt ratio means that it can afford to borrow in order to swallow even meaty entities. Consequently, it could find itself in a position to capitalise on the next uptick of the economic cycle.
Risk vs reward
In spite of this rosy outlook in the long term, Diploma is not immune to the wider economic climate. It is likely that its growth will slow as its operating conditions are adversely affected, hurting its revenue stream. Its share price will also likely suffer volatility over the coming months as the energy crisis and the fluctuating pound pummels British assets.
However, its long track record of growth, sound numbers and potential for expansion mean that I am buying for the long run.
