Capstone Turbine (NASDAQ:CPST) will be issuing an earnings release for its second fiscal quarter in early November. At that time, I expect the stock to move back up towards $1.50. Cowen & Co. expects much more (over a longer time horizon) with a recently issued price target of $1.90. Is the optimism justified?
Capstone had a poor first fiscal quarter when, during the last week of that quarter, key orders failed to ship because of credit concerns of three of its distributors. That quarter marked the first time in 6 years that Capstone failed to show year over year quarterly revenue growth, and the shares were hit hard, dropping from an intra-day high of $1.52 in late July to a low of $1.10 after the earnings were released in early August.
Not only was the revenue of $24.4 million well below expectations, but the backlog of orders at the end of Q1, after adjusting for the nearly $8 million that failed to ship, showed no growth from the $148.9 million that Capstone had at FYE 2013. That backlog is a critical piece of data for the company's investors. Capstone does not issue guidance the way that many companies do. For revenue, we are told to look at backlog, and on the August 9th earnings call, CEO Darren Jamison said:
As I said in the prepared remarks, we're not changing the guidance we gave you last quarter. So the backlog that we entered the year with is a good indicator of what we think we'll do for the year.
At the August 29th shareholder meeting three weeks later, with the quarter two thirds complete and five months through the fiscal year, Jamison again discussed backlog.
Backlog of $148.9 million. Again, another record backlog. As we say, what we end the year in backlog year is a good telltale sign of what revenue for the next year in general should be. It's a good indicator, obviously, not [ph] dollar for dollar.
It is sometimes difficult to trust this management team. During the Q&A at the annual meeting, a question came up about cash break-even.
...2 years ago, management said they're 3 or 4 quarters away from implementing their target cost reduction goal of 28%. Little progress has been made on that front. ... As we said before, we committed to a 30% cost reduction, we've got 18% done, we have 12% to go. It has taken us longer than we thought. We can say its engineering challenges, purchasing challenges, some of it is vendor-related. U.L.'s not on my Christmas card list, you always got 2 speeds, slow and stop, I love them, but they don't have the sense of urgency that we all have. ...the part of our challenges is we got to make sure we execute without improve -- hitting reliability. So to slam in a new cost reduction with a new vendor or new design, have that impact reliability of the product, we're not going to do it. So part of our cost reduction challenge is just making sure that we do it right and that we don't it too fast. ... So integrity of our supply is just as important as getting the costs out. Quality is even more important than getting the cost out.
So, failure to lower costs is U. L.'s fault, or the supply chain, or... Well, you get the picture. It is a management that doesn't step up and take responsibility and state that it got the forecast wrong. Revenue didn't make the numbers because Europe came in at half the rate of the prior year, but again, it wasn't management's fault.
More recently, at the Craig-Hallum 4th Annual Alpha Select Conference on September 26th, Management again had the opportunity to back away from the "soft" revenue guidance on September 26th. Instead, the same familiar slides were used discussing revenue, backlog, margins and growth trajectory.
Earlier I wrote "Is the optimism justified?" Is it different this time? I think it is, and the press releases about orders during the second quarter would seem to support this view. Whether Cowen & Co.'s aggressive 70% share price appreciation is justified is another matter.
The good news is that even if Cowen is overly aggressive, and the shares "only" get back to the $1.52 price set in late July, there is still the opportunity for a gain of more than 20% -- a gain I believe will be realized shortly after a successful second quarter report.
Jamison said, "So integrity of our supply is just as important as getting the costs out. " I only wish he had talked a bit more about the integrity of management forecasts.
Disclosure: I am long CPST. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: In addition to a long term position I have held for 5 years, I may make short term trades at any time.