4 small caps with momentum and room to grow

Taking a look over small cap ($300 million-$2 billion in market capitalisation) companies, these four exhibited strong growth in net profits over the past three years. They are not just one-hit wonders that pop up one year only. They have momentum behind them, and have room to grow in their small cap range.

Energy Developments (ASX: ENE) is a renewable and low carbon energy producer that operates 75 power stations domestically as well as in the US and Europe.  Some of their energy sources are landfill methane gas and waste coal gas. It also sets up remote energy power generation for smaller scale use.

Over the past three years it has grown its net profit after tax (NPAT) an average 49.5% annually. Its net profit margin is now 14.2% and price-earnings (PE) ratio is 16. Currently, it is buying back shares, which it started back in September 2012.

Austbrokers Holdings (ASX: AUB) offers insurance broking services for personal, commercial and industrial sectors. It made investments in two underwriting companies in May, taking 90% interests in both for $9.9 million. This acquisition is the seventh over the past three years.

Average annual NPAT growth has been 31.3% over the past three years, with earnings going from $20 million to $38 million. Its net profit margin is 23%, and its PE ratio stands at 22.

Mineral Resources (ASX: MIN) is a mining services and processing company. Although mining companies are pulling back on developments and new projects, they still have to process what they have dug up, and with iron ore prices and shipping volumes increasing, there is still work to do.

The company is worth $2.1 billion by market capitalisation, so it is at the top end of small-cap companies, with $2 billion generally considered the level where mid-cap companies begin. It has been growing its NPAT annually on average by 23.4% over the past three years, with a net profit margin of 16.5%.

Domino’s Pizza Enterprises (ASX:DMP) operates Domino’s pizza chain stores in Australia, Europe and has just taken a 75% stake in Domino’s Pizza Japan, which will add about 250 stores, plus have growth potential for around 350 more in the future.

Since 2010, NPAT has increased from $17.8 million to $28.6 million, for an average annual growth rate of 17.7%. Net profit margin is only 13%, but return on equity (ROE) is 27.9%, a good number for investors.

Abacus Property Group (ASX: ABP) is a property investment and funds management group. It has $1.8 billion in property under management, primarily along the eastern coast. It has been experiencing abnormal charges due to property value write-downs since 2009, but they are getting smaller each year as the property market is recovering.

During that time rental and investment income has been increasing, with the average annual NPAT growth at 33% for the past three years. Net profit is 48.7%, with earnings rising 37% in 2013 thanks to abnormal charges dropping from $54 million to $15 million.

Foolish takeaway

When looking for strong earners, make sure that the profit growth is not just a one-off event like the sale of a property or assets. A one-year bump in profit may not be repeatable, so calculate the median and average changes over three, five or even 10 years to see how predictable future earnings growth can be. Earnings drive dividend and share price growth, so you want a smooth growing business for your share returns.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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