Avon Rubber (LSE: AVON) is far from a household name but the share price of the £300m market cap manufacturer has nearly tripled over the past five years, which makes the company well worth taking a look at.
First off, this stellar share price performance isn't without good cause as the company's earnings per share have risen from 26.9p in 2012 to 74.2p last year. This growth has been driven by both organic expansion and a series of acquisitions that have increased the company's product range for both its dairy solutions and protective masks for militaries and emergency personnel.
The European dairy market has been through the ringer of late as a global supply glut drove down prices and reduced demand for Avon's products. However, management has taken this as an opportunity to increase market share and transition sales to its in-house-manufactured products that offer higher margins. With dairy prices beginning to rebound and farmers once again investing in their farms, Avon is already benefitting as dairy division revenue rose 22% year-on-year in H1 to £25.2m.
Sales of the group's protective respiratory systems also rose by 22% to £55.9m as the US Department of Defense ordered high volumes of equipment and overseas demand increased substantially. Stripping out the positive effects of the weak pound did lower group revenue growth to 7%, but this is still a very healthy amount.
While group margins stayed level, profits and cash generation rose in line with sales growth and the company ended H1 with £12.6m in net cash, which supported a whopping 30% increase in the interim dividend. The company's outlook over the long term will still be influenced by the cyclical nature of its two markets, but management is doing well to re-invest cash in expanding its portfolio of brands and pushing into new regions. With its shares priced at just 14 times forward earnings, I reckon investors would do well to dig deeper into Avon Rubber.
Finally turning a corner?
One small-cap offering a much higher ceiling but with much more risk for investors is Ceres Power (LSE: CWR). The company's SteelCell fuel cell technology has long been lauded as the next big thing in a world seeking to lower carbon emissions, but so far the company has had little luck commercialising its product since going public over a decade ago.
That said, there have been tangible improvements in recent years under a new leadership team that has signed partnership agreements with major players in the automotive, energy and data centre sectors to utilise the SteelCell product to reduce operating costs and trim emissions.
The benefits of these agreements are starting to flow through to the company's financial statements as revenue for the year to June more than doubled to £4.1m and its order book increased to £3.2m. Unfortunately, sales still do not cover operating expenditures and pre-tax losses for the year were £9.4m.
While losses are narrowing the company is still reliant on shareholders to fund itself through rights issues such as the one in October that raised £20m. Ceres' SteelCell technology certainly has high potential to reduce energy costs for consumers and business alike, but investing in lossmaking small-caps is simply too risky for me so my interest will remain academic for now.
One small-cap that's had no problem producing profitable growth is the Motley Fool's Top Small-Cap of 2017, which has increased earnings by double-digits four years in a row. On top of steady growth, the company will also attract value investors as it trades at just eight times forward earnings.
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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.