Is Capstone Turbine Great or What?

Following superstorm Sandy (we can't call it a "hurricane"), I endured five days without power and sat for hours through 1970s-style gas lines. While those are minor inconveniences compared with those who lost homes, businesses, and even their lives because of the storm, it still highlights our vulnerability should a real calamity strike.

This storm barely exhibited hurricane-class winds, yet the Northeast was brought to a standstill. The entire engine of electricity generation seized as millions were left without power and fuel. New Jersey's major utility operator, Public Service Enterprise Group (NYSE: PEG  ) , and New York's Consolidated Edison (NYSE: ED  ) , along with numerous smaller entities, were positively frantic trying to get power restored. I love the quote from fellow Fool Sara Wright discussing the need for the Smart Grid: " Consider that today's grid was invented in the age of Edison, designed in the age of Eisenhower, and installed in the age of Nixon." Yeah, we might be due for an upgrade.

But throughout the entire storm and its aftermath of devastation, there was one power generation provider that didn't go dark. Alternative-energy producer Capstone Turbine (Nasdaq: CPST  ) says that from Virginia to Massachusetts, its customers weathered the storm without losing power.

While shale gas installations figure prominently in its customer list (and they smartly switched over from their local utility feed to Capstone's microturbines as the storm approached), luxury hotels, office buildings, data centers, health-care facilities, and industrial customers also rode out the superstorm using its microturbines. In New Jersey, Salem Community College was one of the few facilities that remained continuously powered by three C65 microturbines and was turned into a Red Cross relief shelter as a result.

Let's look at the company that one smart analyst says could cripple the utilities.

Capstone Turbine snapshot

Market Cap

$286 million

Revenues (TTM)

$117 million

1-Year Stock Return

1.1%

Return on Investment

(72.5%)

Estimated 5-Year EPS Growth

30%

Dividend and Yield

N/A

Recent Price

$0.94

CAPS Rating (out of 5)

****

Source: FinViz.com; N/A = not applicable; Capstone Turbine doesn't pay a dividend.

For all the promise of its microturbines, Capstone has yet to achieve profitability. While it moves closer to the goal, it still exhibits a lot of volatility, and as a penny stock, inherently it carries a lot of risk.

Math is hard
Profits remain elusive, but margins continue to expand. Revenues rose 9% last quarter, hitting $30.1 million, a record achievement for Capstone, while gross margins also widened to 9%. It's had positive gross margins in eight of the past nine quarters and has witnessed its fifth straight quarter of expansion. Its backlog continues to grow, and it saw a robust order flow that increased 21% year over year.

I like the premise behind Capstone, but I've noted in the past that its reliance on natural gas drillers for microturbine sales could prove dicey in the current weak pricing environment. Southwestern Energy (NYSE: SWN  ) , Encana (NYSE: ECA  ) , and Chesapeake Energy (NYSE: CHK  ) have all announced cutbacks in production because of low prices, as have Kodiak Oil & Gas (NYSE: KOG  ) and EOG Resources (NYSE: EOG  ) .

Business will come back, but it just might not be anytime soon, and while it has $45 million in cash on its balance sheet, meaning it should be in no danger of running out any time soon, the double-digit revenue gains it's recording is still coming up short of expectations.

In the sight of greatness
I've had an outperform rating on Capstone on Motley Fool CAPS, the 180,000-member-driven investor community that translates informed opinion into stock ratings of one to five stars. While the stock has fallen almost 4% since I weighed in on it in June, compared with a 6% rise in the S&P 500, I'm confident the tide will turn for the microturbine maker and that both sales and profits will power its rise.

But let me know in the comments box below if you think the fallout from Superstorm Sandy and the mounting criticism over how utilities responded to the crisis will provide a jolt to Capstone Turbine's prospects.

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Read/Post Comments (10) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 28, 2012, at 10:12 PM, kthor wrote:

    I like Capstone Turbine but didn't hear of any new orders after the storm, am i right? I think they need better sales people going around the east coast selling to hospitals, police stations, etc ...

  • Report this Comment On November 29, 2012, at 8:01 AM, rebellemming wrote:

    Capstone management needs to develop a marketing strategy and perhaps modify the product offering to appeal to a wider range of consumers. "micro turbines" are...??? On the other hand, insurance helps you keep what you have be it communication devices, security systems, heating controls, or food in the freezer. And remember--a penny saved is a penny (or two!) earned TAX FREE (?) .Perhaps high income earners will invest in powering lighthouses at the edge of the fiscal cliff--a worthy insurance indeed. Save a lemming today and help CPST pay me a dividend!

  • Report this Comment On November 29, 2012, at 12:32 PM, crankyolfart wrote:

    Capstones management keeps their hand too close to the vest for stock movement. They have no investor relations staff or if they do they're invisible. They haven't answered a "ask management" question on their site since June, they only talk about oil drillers instead of working with architects which in the aftermath of Sandy, they should be setting their sites.

    Still, the product is great and has enormous potential, if it weren't for that I'd walk right by.

  • Report this Comment On November 30, 2012, at 5:23 PM, mert9 wrote:

    I am a long time shareholder of Capstone, and the worse thing you can do is build up expectations for this stock. It has never turned a profit, despite having fabulous technology and excellent customers. For many years, the company used "PR Puff Pieces" to create movement in the stock price. Finally, investors got wise and realized management sold blue sky enthusiasm, but didn't make money. I lay the blame at management. Sure, we can be encouraged by its recent progress. But please, don't provide any excuses for CPST management to spend money on something else, like targeting more markets. The company has an enormous back log of orders, plus over $100 million in annual sales. What CPST needs is better management discipline.

  • Report this Comment On December 01, 2012, at 11:37 AM, JAVKO wrote:

    Having a niche technology on its own is no garantee to profitability. Choosing a stock where management is committed to making profit and rewarding shareholders is far more important.

    I would like management to come up with a more solid plan where they clearly outline their view to that effect.

    There was positive news recently with management textending their offerings in Russia and some orders should follow. But management should clearly show and convince us how they are going to turn orders to profits. That will definitely move the stock positively - just look at OCZ stock price after its recent PR. Afterall, only AMZN goes up when it makes a loss!

  • Report this Comment On December 03, 2012, at 8:29 AM, bstobin wrote:

    I agree with other posters that the problem is management. There is no excuse why this company with its product, should still be struggling to break even. It is frustrating to hear them continually brag about a "record backlog" of orders. A well run company would be matching capacity to demand. The market for this product is there but current management appears clueless in taking advantage of it.

  • Report this Comment On December 03, 2012, at 12:11 PM, colin54 wrote:

    As a UK investor who spotted this company a couple of years ago I continue to build my position. That said I can't help but agree with most of the comments above. The technology is proven and reliable, markets are there to be exploited but sadly the current management has no vision to exploit all the opportunities as Sandy has lain bare.

    Capstone has the opportunity to be 10x (and some) its current size within 5 years if management can come up with a dynamic global marketing strategy. Make it so. – Perhaps a part time job for Mel Karmazin when he exits SIRUS XM in Jan 2013. A couple of hours a week should do it.

  • Report this Comment On December 03, 2012, at 7:18 PM, englishjames wrote:

    Recently sold out of CPST...Reason? It cannot SELL its product at a profit...Held for 4 years...Not well run, borderline dishonest management. Dilution is a killer. Hope this tech succeeds, and I may buy again but timing is EVERYTHING and CPST's time is at least a year away...Maybe 2014 will be the year. Will Cap still be here? This is not about improving margins, revenue etc...Until buyers are willing to pay a profitable price or Cap can make it for much less, the shorts will continue to run down its stock price.

  • Report this Comment On January 01, 2013, at 1:25 AM, VoiceORezon wrote:

    Guys, the problem is that their product is about 4-8 times more expensive than the competing 4-cycle internal combustion competitor. DUH!!

    Just guessing that the posters on this thread are trying to get above water and dump there position in this issue.

    The ONLY way for this company to become viable is to drive the production and commissioning costs of their product down until its equivalent to its internal combustion competition. Barring that, they will be relegated to their original (and IMHO only) market which requires the combustion of sour gas in remote locations to power oil exploration.

    Can't believe this reality isn't in any of the former posts. Management may be to blame, but only in that they haven't pressed the engineers to reduce production costs. These aren't airworthy jet engines, get those production process cost down!

  • Report this Comment On March 18, 2014, at 1:39 PM, shawncorrigan wrote:

    while capstone turbines are more expensive the maintenance is less,i like the air bearings with no oil and cooling that could give long life ,i've heard of 20 years. the burning of flash fuels is another beauty. oil exploration,sewage treatment and landfills have escaping gas that is usually captured and burnt,this can be used by the micro turbines and burn clean where other engines need scrubbers which are expensive and require maintenance and off-time.many new eco rules require this methane to be dealt with.

    ships are using them and even small yachts.

    also hybrid car and big semi-trucks.

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