Riding the Alt Energy Wave with Capstone Turbine Corp. (CPST)

With the United States’ energy policy focused on ramping up domestic production to reduce foreign oil dependence, shares of alternative energy companies have been in demand so far in 2014. The prices of many stocks even remotely associated with hydrogen fuel cells, for example, have experienced at least a temporary run-up, as have bio-fuel issues. One promising company in the non-traditional energy space, Capstone Turbine Corp. (CPST) and has been hitting fresh 52-week highs in recent weeks. They could be poised for more gains ahead as the company’s business model begins to hit on all cylinders.

Capstone Turbine Corporation develops, manufactures, markets and services microturbine technology solutions for use in stationary distributed power generation applications. This includes cogeneration (combined heat and power (CHP), integrated combined heat and power (ICHP), and combined cooling, heat and power (CCHP)), renewable energy, natural resources and critical power supply. In addition, its microturbines can be used as battery charging generators for hybrid electric vehicle applications. Microturbines allow customers to produce power on-site in parallel with the electric grid or stand-alone when no utility grid is available.

When shares of Capstone first came to market almost 15 years ago, the stock was very much in favor, quickly surging north of $80 per share. As fate and market conditions would have it, however, the company’s highly regarded, innovative technology failed to find enough buyers to support the lofty share price. With profitability years away, stockholders rapidly bailed on the issue. As a result, over the past five years CPST shares have occasionally traded under $1 each, while remaining firmly locked into a $1 – $2 channel during that period. Right now, however, the tide finally appears to be shifting in Capstone’s favor on several different fronts.

CPSTchart

Primarily, Capstone management has weathered the slide and slowly but surely grown sales—with revenues weighing in at a healthy $100 million for fiscal 2012. Analysts expect that number to accelerate to $175 million in fiscal year 2013. Other key metrics are on the upswing as well, as gross margins have doubled to around 20% over the past 18 months, primarily due to larger deals and installations. In addition, Capstone cut its quarter-over-quarter loss from $8 million to $2 million during its most recent reporting period and currently has $31 million in ca

The trend in firming margins is directly related to the growth in deal size. The average selling price per micro-turbine rose from $158,000 a year ago to a recent $184,000. “Capstone used to be considered primarily for 1- to 5-megawatt opportunities or installations, so we migrated up in project size, so that Capstone is now being considered frequently as a solution for projects that are in 25-megawatt range,” said CEO Darren Jamison in a recent call with analysts.

As long as the improved margin and pricing trends remain intact, Capstone appears destined to enter the realm of profitability sooner rather than later. For its most recent reporting period the company’s quarterly loss fell to just $2 million, down from quarterly losses that routinely exceeded $8 million in recent years. Moreover, the company’s current $31 million cash war chest mitigates against Capstone needing to initiate any kind of potentially dilutive secondary offerings.

Finally, the company’s natural gas powered micro-turbines remain a simpler alternative to the more complex hydrogen-powered fuel cells built by rivals. They are also being used for a wider range of applications, and are especially valuable to customers for whom grid power isn’t readily available. Energy drillers, for example, can employ the company’s micro-turbines right at wellheads, where large amounts of power are needed.

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All of these factors have translated into a nice price bump for CPST, with shares breaching and holding above the $2 mark for the first time in a half-decade — hovering around the $2.25 mark right now. The share price move is particularly notable given that Capstone sports a massive float in excess of 300 million shares, with daily trading volume averaging over 11 million shares daily over the past year.

While part of the enthusiasm for CPST stock is no doubt related to broad-based sector buying, it appears to be equally related to the company gaining significant top and bottom line traction en route to profitability in the not too distant future. In fact, management expects the company to post breakeven results in its next reporting period, with the anticipation of turning profitable in fiscal year 2014.

Given the weighty public float, it may take some time for the issue to digest its recent gains in anticipation of another run higher. That run, however, could begin as soon as the company issues its next quarterly earnings statement!

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All of these factors have translated into a nice price bump for CPST, with shares breaching and holding above the $2 mark for the first time in a half-decade — hovering around the $2.25 mark right now. The share price move is particularly notable given that Capstone sports a massive float in excess of 300 million shares, with daily trading volume averaging over 11 million shares daily over the past year.

While part of the enthusiasm for CPST stock is no doubt related to broad-based sector buying, it appears to be equally related to the company gaining significant top and bottom line traction en route to profitability in the not too distant future. In fact, management expects the company to post breakeven results in its next reporting period, with the anticipation of turning profitable in fiscal year 2014.

Given the weighty public float, it may take some time for the issue to digest its recent gains in anticipation of another run higher. That run, however, could begin as soon as the company issues its next quarterly earnings statement!

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Good luck with this and all of your trades.

Warren Gates
Senior Analyst
Normandy Research

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