Buy resilient Diploma

But distribution group Diploma has recently suffered its own spell of uncertainty following the abrupt departure of chief executive Richard Ingram in August after his appointment in May to replace Bruce Thompson, who had spent 20 years at the helm. The full-year results reported costs of £2.1m related to the abortive appointment as well as the beginning of a new recruitment process. It looks as though the company and its shareholders may now be able to draw a line under the succession saga with the announcement earlier this month that Johnny Thomson, former finance director of food service group Compass (CPG), will take the top job in late February.

The end to the management angst will hopefully shift focus back onto the attractions of Diploma's business. The group provides specialised technical products – components as niche as specialised wiring, seals and surgical instrumentation – as well as services related to those products. If this sounds like an odd assortment, rest assured there is a method behind the apparent madness. The group’s three divisions – seals, controls and life sciences – are each exposed to different demand cycles, and therefore have the potential to prop each other up during tough times. One thing unifying the three is that customers tend to fund purchases from their operating rather than capital budgets, which makes demand more resilient.

Taking a long-term look at operating profit growth and margins (see graph) helps illustrate the attractions of the model, with the financial crisis only registering as a minor blip in performance. What more, this impressive track record is backed up by strong cash flow, with operating cash conversion of over 100 per cent in every year since 2011.

A slow down in orders as a result of the timing of Christmas a new computer system at the seals business meant margins were down slightly in the first quarter but broker Numis still forecasts modest progress for the year as a whole. Meanwhile, Brexit is not too much of a threat given only about a quarter of sales come from the UK and its European businesses are chiefly 'in country' suppliers with limited cross-border sales.

Impressive cash flows have help Diploma maintain a strong balance sheet while investing in bolt-on acquisitions as well as organic growth. The group has spent £128m on acquisitions in the five years to the end of September 2018. However, last year's spend of just over £20m fell short of management's aim of £30m-£40m. Finance director Nigel Lingwood has attributed the lower dealflow to the higher prices being demanded by sellers looking to take advantage of bullish markets. However, as economic sentiment deteriorated towards the end of 2018 there could now be richer pickings.