Midas Extra share tips: Diploma and Chloride

By This Is Money
Updated: 12:50 EDT, 15 January 2010

Midas Extra

Diploma
Epic: DPLM

Stockmarket analysts were spooked this week by a raft of gloomy economic data.

Estate agents say house prices are falling and retailers say shoppers are not spending yet inflation has risen to 3%, the highest it has been for five years, and businesses are having to cope with big increases in product prices too.

The news sent many share prices lower and the FTSE 100 index, which had been making tentative progress in recent days, slipped back to 6173. The FTSE 250 index, at 10362, was marginally higher than last week however as investors searched for defensive opportunities.

Clearly, these are harder to find than a year ago. But that does not mean they are completely non-existent. Indeed, many share prices have now hit levels which offer real potential. Diploma is a classic example.

The company describes itself as a specialist distribution business, which essentially means that it supplies lots of different products to lots of different companies around the world.

The range of goods is impressive - from blood test kits for Canadian hospitals to seals for American jack hammers to wiring for Formula One race cars. The group divides all these items into three broad divisions, life sciences, seals and controls.

The first supplies hospitals, laboratories and biotech companies in America and Europe. The second supplies big industrial businesses across the globe, with a particular focus on repair and maintenance. The third supplies the defence sector, motor sport manufacturers, rail and power groups and medical equipment makers.

It also operates around the world although just over half its sales come from the UK.

Diploma does not manufacture any of these products; it simply distributes them. But it makes sure that the goods reach the customers quickly and in tip-top condition. This is particularly important for businesses that either need equipment urgently or stand to lose substantial sums of money if their machinery is not working perfectly.

Most of the items that Diploma supplies have a shelf-life so they need to be replaced or repaired at regular intervals, ensuring a sustainable income stream for the company. The group also benefits from being involved in numerous different industries in numerous parts of the world.

Earlier this week, Diploma reported a 22% rise in pre-tax profits to £13.1m for the six months to 31 March. The half-year dividend was increased by 39% to 2.5p and analysts expect the total payment to rise from 5.4p to 7.5p, giving the shares a yield of almost 4.5%.

Chief executive Brian Thompson is optimistic about the future and his confidence should be trusted more than most company bosses, as he has been at the helm of Diploma for 14 years.

Midas verdict: Diploma shares are trading at 170p but knowledgeable City brokers believe they are worth considerably more. The price has suffered because some analysts find the company hard to understand and worry about its exposure to the US market. These fears are overdone. Buy and hold this stock.

Chloride
Epic: CHLD

Our second company has had an exciting time recently. Midas first recommended Chloride at the beginning of last month, when the shares were trading at 196p. [Read it now in the April archive]

On Monday, the company admitted it had received an offer of 255p a share. The potential bidder is giant American business Emerson Electric, which said it had approached Chloride about a possible offer and was now thinking about whether to bid formally for the company.

Chloride's board has rejected Emerson's initial, informal approach, believing that 255p a share undervalues the business. City followers of the company agree. The group is due to report results for the year to 31 March in June but recently said sales for the period were up 30% and operating profits were around 50% ahead of 2007.

Looking to the future, Chloride has a record order book of £100mand chief executive Keith Hodgkinson is upbeat about the company's prospects.

Chloride focuses on the highly technical power protection market, making equipment that offers uninterruptible power to companies and organisations that cannot afford to suffer from power cuts at any time. These include oil and gas companies such as BP, IT giants such as IBM and Microsoft and even retailers such as Sainsbury's.

The power protection market is expected to grow at 10% per annum over the next five years and Chloride works at the top end of this fast-growing sector.

Shares in the company shot up to 265p after Monday's announcement, valuing the business at £680m. But Chloride's City supporters believe it is worth at least £770 million, or 300p a share and some suggest any bidder would have to pay even more to win the company.

Emerson is the only business to have declared an interest in Chloride so far but others are thought to be waiting in the wings, attracted by the group's particular focus on power protection products.

For American companies, Chloride is also attractive because it has a large amount of European business and it has a joint venture in China too, which is expected to deliver strong growth over the next few years.

Midas verdict: Investors who bought Chloride shares when we recommended them have already seen a 35% uplift in the price. The bid story has only just begun however and the price should rise further over the summer. Hold.