DPLM (Diploma) saw its shares down 11% so far today to 675p on the back of its trading statement. “The Group’s revenues for the half year, on an underlying basis after adjusting for currency effects and acquisitions, are expected to increase by ca. 7% against prior year comparatives. The underlying performance has been strong across the businesses.”
Those with a better than mine may remember that I was actually quite fond of DPLM as a good solid compounder. I had bought some in Jan 2011 at 307p, and sold them in Sep 2012 at 461p. They were on a PE of 14.2 when I sold, and I noted that I didn’t see an extra 50% on the cards “in the near future”.
In hindsight, I pulled the plug too quickly. DPLM currently stands on a PE of around 20, which is at the upper end of its valuation range over the last decade. It’s NOT a glamour stock, so investors have to be more mindful about the range of growth rates and PE levels that
the market is willing to support.
DPLM’s outlook statement said: “At the current exchange rates, the significant appreciation in UK sterling will continue to impact the Group’s reported results on translation. … Gross margins in these [Healthcare] businesses will soften during the second half of the year”.
Clearly, there’s a lot of scare cards in that statement despite the fact that the company has tripled its revenues and profits before tax over the last decade.
DPLM looks due for a rest. A PE of 20 was arguably too high for the company in the first place, and it looks like a re-rating downwards in order.
How do I think the market will price the shares in the medium term? It’s difficult to say, but it’s median PE over the last decade has been 13. That’s actually surprisingly low, and I think maybe a tad unfair. At an EPS of around 37p, that would give it a price of 480p. So the shares could potentially lose around 30% of their current value. Maybe I’m being too harsh, though.
There is, of course, no way I could actually know where it will go, so it’s very much up to you to decide whether what I say makes sense. It might be a good candidate to do a CAPM valuation – but I’ll leave that for another post, particularly since I need to gain more confidence in valuing growing companies.
Anyway, have fun.