Digging for Value in Industrials: Diploma Group and Vp as Contrarian Picks Amid Sector Undervaluation

The industrials sector has faced headwinds in recent quarters, with analysts downplaying growth prospects and cyclicality concerns dominating headlines. Yet, within this gloom, two overlooked companies—Diploma Group (LSE:DPLM) and Vp plc (LSE:VP)—present compelling contrarian value opportunities. Both operate in undervalued industrial niches, yet their stocks have been punished by short-term pessimism, creating entry points for investors willing to look past near-term noise.

Diploma Group: Defensive Resilience in a Cyclical World

Diploma Group is a global industrial distributor with operations spanning controls, seals, and life sciences. While its revenue of £1.45 billion and net income of £167.4 million suggest financial stability, its stock trades at a price-to-sales (P/S) ratio of 0.6x, well below historical norms and peer averages. This undervaluation stems from sector-specific cyclicality: its controls and seals divisions are tied to industrial and construction demand, which have softened due to macroeconomic uncertainty.

However, Diploma's diversification and defensive Life Sciences segment offer a moat against downturns. This division supplies critical medical equipment and diagnostic tools to hospitals globally, a sector with stable demand even during economic slumps. Additionally, Diploma's balance sheet is robust, with minimal debt and consistent free cash flow generation.

Why Buy Now?
- Cyclical rebound potential: Industrial demand is poised for recovery as global infrastructure spending accelerates (e.g., EU's NextGenerationEU plans, U.S. infrastructure bills).
- Valuation discount: At 0.6x P/S, Diploma trades at a 40% discount to its five-year average.
- Dividend reliability: A consistent 2.5% yield, supported by strong cash flows.

Vp plc: Overlooked Growth in Rental & Leasing

Vp plc, a specialist equipment rental firm, operates in a sector often dismissed as “cyclical and risky.” Its recent financials—a 98.8% drop in net income to £171k for the half-year ending December 2025—have spooked investors. Yet, this masks underlying strength in its EBITDA of £108.8 million (28.6% margin), a testament to operational efficiency.

The stock's 35.1% undervaluation versus fair value (per analysts) reflects misplaced concerns over its debt-to-equity ratio (111.9%) and underperformance in general construction. However, two catalysts are being overlooked:

1. Strategic pivot to high-growth niches:
2. The launch of Vp Rail, integrating rail infrastructure solutions, aligns with the UK's £50 billion rail modernization plan (CP7).

3. The acquisition of Charleville Hire in Ireland has expanded its footprint in pharma and renewables, sectors with structural growth.

4. Dividend resilience:

5. Despite earnings volatility, Vp maintained a 6.4% dividend yield, supported by its EBITDA stability and cost-cutting in underperforming divisions (e.g., Brandon Hire Station's restructuring).

Why Buy Now?
- Sector tailwinds: Infrastructure spending in rail, water, and energy will drive demand for specialized rentals.
- Valuation mispricing: At a P/E of 17x, Vp is undervalued relative to peers like Ashtead Group (25x P/E).
- Share buybacks: Management's recent purchases (totaling £1.05 million) signal confidence in long-term prospects.

Cyclicality and Contrarian Timing

Both companies are undervalued due to sector-specific cyclicality. Diploma's exposure to industrial demand and Vp's reliance on construction activity have led to near-term earnings volatility. However, cyclicality is a double-edged sword: when demand rebounds, these stocks could outperform.

• Diploma's controls division: Benefits from industrial automation trends, with global spending on robotics and smart manufacturing set to hit £245 billion by 2027.
• Vp's rail and energy segments: Positioned to capture £120 billion in UK infrastructure spending over the next decade.

Risk-Adjusted Investment Thesis

While risks exist—Diploma's cyclical exposure and Vp's debt burden—their low valuations and structural growth drivers justify a long-term contrarian bet.

Entry Strategy:
- Diploma Group: Target a 5% pullback from current levels (£12.00) to £11.40, near its 52-week low.
- Vp plc: Accumulate on dips below £6.00, with a 12-month price target of £8.00 (40.5% upside).

Conclusion

In a market fixated on short-term pain, Diploma and Vp offer rare value in industrials. Diploma's defensive moat and Vp's overlooked growth catalysts make them compelling buys for investors with a 3–5 year horizon. The cyclicality of their industries ensures that recovery will reward patience—now is the time to dig in.