Capstone Part 3: Still Triple Value Bound

| About: Capstone Turbine (CPST)


Current buying opportunity created by announcement of equity offering.

Data on previous equity offerings that created double-digit returns within weeks.

Continued favorable developments.

Since the time of my September 24, 2012 article wherein I predicted a tripling of the stock price, exciting new developments have reinforced my opinion regarding the increase in value and have created an optimal entry point.

Last month, the stock hit a 52-week high of $2.60 per share - more than 2.5 times the price at the time of my last article. On March 11, 2014, Cowen & Company Analyst Robert Stone commented, "Last week, the ND Industrial Commission decided that new oil wells must submit a natural gas capturing plan to obtain state approvals. Due to a lack of infrastructure, more than 30% of natural gas in ND is flared (vs. a national average of >1%). CPST could power equipment to liquefy or transport gas. The ND Petroleum Council flaring task force indicated the industry plans to invest $1.7B in infrastructure over the next two years. Oil & Gas is the largest revenue segment for CPST... but 90% of shale revenue thus far has come from the Marcellus, Eagle Ford, and Utica plays." Stone also pointed to recent orders from California Hospitals that point to CPST's potential to tap the vertical Cooling, Heating and Power (CHP) market. Considering these developments, Stone lifted his CPST price target 42%, from $1.90 to $2.70, only 10% under the $3 target I set in September, 2012.

The buying opportunity began just last week, when the announcement of a stock price offering triggered an extreme and over-reactive stock sell-off. This reaction bears great similarity to another recent alternative energy play involving FuelCell Energy Inc (NASDAQ:FCEL), when on January 17, 2014, the same lead underwriter, Cowen & Company priced 22 million shares of FCEL at $1.25 per share. The day prior to the announcement (January 16, 2014), FCEL shares closed at $1.64 per share and the day after the announcement (January 18, 2014), dropped 15% to close at $1.40. Yet, FCEL quickly ran back up and saw a new high of $3.93 less than two months later, on March 10, 2014. Similarly, CPST had over a 17% drop in its closing price from $2.06 the day before the announcement (April 30, 2014) to $1.70 on the day after the announcement (May 2, 2014). In both cases, the sale was made to a single institutional investor, both wise purchases in my view.

According to CPST's May 1, 2014 offering statement for 18.825 million shares, as of 3/31/14, there were 310 million shares outstanding; thus resulting in only 6% dilution - far less than the 17% drop in price. Further, as of 3/31/14, the short ratio was only 14.9% of the float. One would expect that number to be much higher now, given last week's sell-off.

Historically, CPST's announcements of equity offerings created excellent entry points. On February 19th, 2010 CPST announced an offering of 38 million shares. The stock had closed at $1.25 the day prior to the announcement and fell to $1.05 a few days later. It then gained 21% to close at $1.27 on March 12, 2010. Shortly thereafter, on March 26, 2012 , CPST hit a 6-month high of $1.35. Another quick rebound occurred in 2012 when, on February 29, CPST announced a 22.225 million share equity offering. The day before the announcement, the stock had closed at $1.18 and fell to trade as low as $0.98 on March 6; but quickly gained over 15% to close at $1.13 on March 21st. It is notable that both of the aforementioned rebounds occurred after offerings that caused more dilution than the current offering.

The company's financials are healthy and Robert Stone expects the company to be EBITDA positive in 2015. The offering statement indicated a cash balance of $27.9 million as of 3/31/2014 and adding the $29.8 million net sale proceeds yields a total cash balance of $57.7 million. With such cash and only $13 million in debt, CPST's balance sheet is strong.

CPST's share price, performance and short interest, as well its positive revenue growth and positive forward P/E ratio, should make it a beacon to investors and traders in lower-priced alternative energy stocks such as FuelCell Energy and Ballard Power (NASDAQ:BLDP). Without excluding the others as good speculative plays, CPST, with its recent pullback and impending turn towards profitability is well worth consideration.

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: This is not an offer to buy or sell securities. Please do your own due diligence and consult with a registered investment professional before investing. There are no guarantees of any investment results and investing carries risk.