Diploma (LSE: DPLM) shares jumped almost 5% in morning trading today (19 May) after another strong set of results and upgraded guidance. But after years of outperformance and a premium valuation, is it too late for investors to buy into one of the FTSE 100’s top-performing growth stocks?

Sustainable quality compounding

The standout feature from Diploma’s first-half results was the strength of underlying growth.

Organic revenue increased 15%, comfortably ahead of the group’s five-year average of 10% and well above the level typically expected from industrial distributors. Importantly, this was not driven by a single business alone. While Controls delivered exceptional performance, management highlighted broad-based momentum across the wider portfolio.

Equally encouraging was profitability. Operating margin expanded by 300 basis points to 24.5%, suggesting growth is not coming at the expense of efficiency or pricing discipline. Many companies can grow quickly or protect margins. Delivering both simultaneously is far harder.

This matters because it reinforces the quality of Diploma’s business model. The company operates in specialist markets where technical expertise, customer relationships and value-added services can support stronger pricing power than more traditional distributors.

Management’s upgraded full-year guidance adds further weight to that argument. Organic growth expectations have increased from 9% to 12%, while operating margin guidance remains around 25%.

Taken together, these results suggest a company benefiting from more than favourable market conditions alone. Instead, they point towards a business continuing to strengthen its long-term growth profile while maintaining operational discipline.

The engine of future growth

Acquisitions remain a central part of the Diploma investment story — and activity is accelerating.

The group completed 15 deals over the last 12 months, investing around £310m at an average acquisition multiple of roughly 8x earnings. Seven of those transactions have taken place since the company’s Q1 update alone, representing around £180m of additional investment.

This matters because its model is not built around large, transformational mergers. Instead, management targets smaller specialist businesses operating in attractive niche markets where technical expertise and customer relationships create defensible positions.

Recent deals also show where management sees future opportunity. The proposed acquisition of CDM, a US interconnect business supplying defence and industrial markets, increases exposure to areas already benefiting from structural demand tailwinds.

Importantly, this expansion has not materially stretched the balance sheet. Despite the increased deal activity, leverage remains modest at just 0.8x EBITDA, leaving significant financial flexibility for further expansion.

What could go wrong?

No acquisition strategy works flawlessly forever.

Controls delivered exceptional growth this half, supported by favourable conditions across defence, datacentres and energy. That pace may prove difficult to sustain indefinitely.

At the same time, Diploma’s long-term record increasingly depends on integrating acquisitions successfully and maintaining disciplined deal pricing. If growth in key divisions slows or acquisitions fail to deliver expected returns, investor expectations could become harder to satisfy.

What’s the verdict?

With a trailing price-to-earnings multiple of nearly 50, Diploma is not a stock many investors would describe as cheap. But premium businesses rarely are.

For me, these results suggest the group continues to justify that rating through strong organic growth, expanding margins and disciplined acquisitions. After such a long run, some investors may feel they have missed the opportunity. I’m not convinced that is necessarily true if the compounding story remains intact.

Andrew Mackie owns shares of Diploma.