Diploma PLC announces acquisition: is share price growth ahead?

Does Diploma PLC (LON:DPLM) (DPLM.L) offer stock price growth potential?

Diploma PLC
Diploma PLC

Technical products and services specialist Diploma PLC (LON:DPLM) (DPLM.L) has announced the acquisition of Actios for an undisclosed sum. It is the parent company of the Gremtek Group, which provides own-branded protective sleeving and cable identification products.

Gremtek operates principally in France, but also in Germany and elsewhere in Europe. It has 27 employees at its Paris site, as well as a further 10 employees at its site in Germany.

Gremtek’s range of own-brand products are used in harsh environments and in complex applications that require a high level of technical support and knowledge. The business will be integrated into the Interconnect group within the Controls Sector. It will form part of Diploma’s strategy to develop a broader business across Europe, as well as provide a complementary range of own brand products for Interconnect’s existing markets.

In the year to 31 December 2017, Gremtek generated sales of €10.8 million and normalised operating profit of €1.3 million. The purchase of the company will be immediately earnings enhancing.

In my view, the acquisition could be positive news for Diploma. It appears to provide it with additional growth potential across Europe, and is expected to be integrated into its existing operations.

With the company forecast to post a rise in EPS of around 10% in the current year, its performance from a business perspective seems to be positive. It appears to have a solid strategy which could lead to a rising bottom line over the medium term.

The company, though, has a forward P/E ratio of around 26. In my opinion, this suggests that it lacks a margin of safety, and could therefore lack investment appeal. Investors could have factored in its profit growth outlook over the coming years, and this may reduce its capacity to deliver a rising share price in future years.

Therefore, while I’m upbeat about its prospects as a business, I feel that it could lack investment potential at the moment.

About Robert Stephens 5430 Articles
Robert Stephens is a CFA Charterholder and an Equity Analyst by trade. He is a passionate private investor who has been buying and selling shares for many years, owning a wide range of UK shares in the process. He has written for Citywire and The Motley Fool US and now runs his own business. To contact Robert, please email info@investomania.co.uk or use one of the other contact methods available on the 'Contact Us' page