Diploma (LSE:DPLM) has been among the FTSE 100’s strongest performers over the past five years, turning a £10,000 investment into £23,959 over that period.
The company reported 17% revenue growth in the six months to the end of March, with wider margins pushing earnings per share up by 36% over the same period.
Diploma’s Controls division, which distributes cables and fasteners, has been a significant driver of that growth, benefitting from robust demand across several sectors.
Increased defence spending has fuelled demand for aerospace components, while a surge in data centre construction has translated directly into strong cable sales for the Business.
Following the strong results, Diploma raised its full-year forecast, which sent the share price higher as investors responded positively to the upward revision.
Despite the recent momentum, analysts have flagged a clear risk at the heart of Diploma’s business model. The company sells into cyclical end markets, meaning a slowdown in aerospace or data centre demand could hit growth hard.
The stock trades at a price-to-earnings ratio of around 31, a level that leaves it exposed to a sharp correction if demand in those key sectors begins to fade.
That scenario has already played out once. Early in 2025, a slowdown in Diploma’s revenue growth sent the share price down 20% in just two months, illustrating the dangers of high multiples in cyclical industries.
Despite that drawdown, the stock remains 47% above its previous highs, suggesting investors who held through the dip have still seen strong returns over the longer term.
Diploma’s stated ambition is to achieve 5% annual organic revenue growth, a target that some analysts argue does not justify the current valuation multiple the market is placing on the stock.
Outside the Controls division, results fell short of even that 5% organic growth target, raising questions about whether the broader business can sustain the pace of expansion investors are pricing in.
The recent uplift driven by aerospace and data centre demand may not prove durable, and analysts note that cyclical industries can lose momentum quickly and without much warning.
Diploma remains a stock that many investors are watching closely, but the consensus among cautious observers is that the current price demands a high degree of confidence in continued cyclical tailwinds.
For investors weighing up the opportunity, the combination of a stretched valuation and reliance on cyclical demand sectors presents a risk profile that warrants careful consideration before taking a position.