Jefferies expects earnings downgrades at Diploma

24th Mar 2014 10:47

Jefferies has retained its 'buy' rating for technical product firm Diploma but warned that currency headwinds will likely result in mid-single digit downgrades to earnings estimates for this year.Diploma, which operates through its Life Sciences, Seals and Controls divisions, said on Monday that underlying revenues for the half year ending March 31st are expected to be up 7% year-on-year, ahead of Jefferies' 6% growth forecast.Jefferies said this implies that organic growth had improved to 8% in the second quarter from 6% in the first, "driven by an impressive bounce-back in the Controls division".However, guidance for first-half adjusted profits to be similar to last year's £26.9m suggests that margins are lower than expected, the broker said. This is mainly due to FX pressures as 75% of Diploma's sales are generated outside the UK."As a result of FX, we anticipate that adjusted earnings per share for the financial year ending September 30th and beyond will move down by mid-single digits," Jefferies said."While this is disappointing, underlying growth is strong and underlying margins should experience a tailwind as the investment for growth programme finishes."A 750p target price has been maintained.The stock was down 9.4% at 688.74p by 11:17.BC