Finals from a CIS Portfolio Stock.

Final results today from Diploma (DPLM) which is  held by the Compound Income Scores portfolio. This one which was purchased at the inception of the portfolio in April this year and has been a disappointing performer as it has fallen by around 24% since then. This has come on the back of a fullish rating when it was purchased and some down grades to earnings from 38.83p to 37.24p since then. So we have had a 4% earnings down grade and a 20% de-rating which shows the importance of valuations and how changes can really make a difference to your investment returns.

Note to self, perhaps I should tighten / lower my value criteria for new entrants to a more average level of say 14 to 15x or less rather than using the maximum PE & minimum yield of 20x & 2% that I'm prepared to pay. Food for thought there, although quality income / growth candidates do tend to get recognized and rated accordingly. So may be I'll think about that at and perhaps review it at a future quarterly / annual review. Any way since Diploma's score has deteriorated on the back of the down grades to 80 and it has therefore been flirting with the sell zone in previous quarterly reviews, lets see if today's numbers make the grade.

The turnover remarkably came exactly in line with forecasts but this was boosted by acquisitions which added 11% to turnover, while currencies took 3% off and underlying growth was 1`% to leave overall turnover up by 9%.  Meanwhile the earnings actually came in around 1p or 2.7% better than forecast at 38.2p albeit not quite back to April's level, at least it was around 6% growth. The dividend was more in line although a smidgen ahead of forecasts at 18.2p rather than 18.1p. for a rise of 7% which they said was reflecting their strong financial position and confidence in the Group's growth prospects.

You can read more about the business and their strategy by clicking the name link at the start of this post. But essentially they are a distributor of specialized technical products and services in the Life Sciences, Seals and Controls areas which they enhance via acquisitions. Thus they describe their strategy as:

"The Group's "Acquire, Build, Grow" strategy is designed to deliver strong, double-digit growth by building larger, broader-based businesses in the three Group sectors."

Thus they saw the double digits revenue growth before currency effects this year, but that only fed through to 6% or so earnings growth as they flagged a 0.4% lower adjusted operating margin this year (although still a decent 18.1%) and significant transactional currency effects in Healthcare businesses plus initial dilution from acquired businesses.. While on the outlook the chief executive Bruce Thompson said:

"While the Board remains cautious on the current macroeconomic backdrop, we remain confident that the Group's resilient business model with a diverse geographic spread of activities and strong financial position, together with a more favourable environment for acquisitions will provide a good platform to deliver further growth in the coming year."

So thinking about the growth prospects on this one you might hope to see double digits growth based on their strategy commentary, but the current and forecast run rate for the coming year seems to be around 5% to 7% which could suggest some modest up grades today, given the small beat to give say 40p of earnings and perhaps 19.5p of dividend. At this morning's price of 643p, which is up 5%+ on Friday's close leaves them on around 16x with a 3% yield. This seems reasonable for a business with decent margins, a good ROCE., decent free cash flow and a balance sheet with little or no debt. So a lot to like but clearly still not a bargain, although the earnings yield, based on this years turnover and margin is now a decent 8.3% which could suggest some upside.

Looking at the chart this shows the weakness that I alluded to at the start of this piece. It also show the shares looking close to being over sold on the RSI and showing some positive divergence on this measure too. So with these slightly more positive results, scope for some small upgrades I could see some modest upside in this one and I note the gap and a recent peak around 700p which might be the extent of any rally in the short term, although this might afford a capital return of around 10% from here plus nearly 2% from the final dividend announced today. This would put it on a not impossible 17.5x with a 2.8% yield. The shares will of course remain in the portfolio for now until the next quarterly review, which is due at the end of the year when we'll see if they still make the grade, but at least is seems they should not do too much more damage in the short term before that.