RBC Capital Markets upgrades its outlook for the specialist distributor after a stronger-than-expected first half.
Diploma PLC (LSE:DPLM), the FTSE 100 specialist distribution company, has had its price target raised to 6,600p from 6,200p by analysts at RBC Capital Markets, who also upgraded the stock to "outperform," after the company sharply upgraded its own full-year guidance following a strong first half of trading.
Diploma raised its organic revenue growth guidance to 9% from 6% and lifted its operating margin (EBITA) target to 25% from 22.5%, driven by an outstanding performance at Peerless, one of its controls businesses, as well as solid growth across its other divisions, including life sciences and North American seals.
RBC now forecasts adjusted earnings per share of 223.9p for the financial year ending September 2026, up 15% on its previous estimate, with a further 14% upgrade to 232.8p for 2027.
The analysts expect the margin improvement to moderate next year, with EBITA forecast to ease back to 24.2% in 2027 as some controls businesses face tougher comparisons, and organic growth is projected to slow to 6%.
Beyond the near-term numbers, RBC argued that Diploma's valuation premium over sector peers remains justified, pointing to the company's track record of high returns on invested capital (ROIC) and consistent earnings growth.
The bank also highlighted the company's firepower for acquisitions, estimating Diploma could spend more than £1.1 billion on bolt-on deals over the next three years while keeping its debt-to-earnings ratio below 1.5 times, a level of gearing analysts described as conservative.
RBC said that level of mergers and acquisitions activity could add around 20% to earnings per share.
Diploma's shares were trading at 5,865p (down 1%), implying upside of around 12% to the new price target.