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Summary

  • Obama factor expected to provide immediate upside.
  • Attractiveness of capstone relative to fuel cells.
  • Expectations about upcoming earnings call.

Since the time of my last article, Capstone Microturbine (NASDAQ:CPST) shares have increased 13.5% from $1.33 to a close of $1.51 on May 30, 2014. In response to questions from numerous readers, I write to provide an update on why I continued to add to my fund's position in CPST.

Immediate Acceleration by the Obama Factor

President Obama will use his executive authority to cut carbon emissions from coal-fired power plants by up to 20%, which will force industry to pay for the carbon pollution it creates. The new regulation was written by the Environmental Protection Agency and is "…the strongest action ever taken by an American president to tackle climate change and could become one of the defining elements of Mr. Obama's legacy." The detailed plan will be revealed Monday, June 2, 2014. The plan is expected to "…allow each state to come up with its own plan to cut emissions based on a menu of options that include adding wind and solar power, energy-efficiency technology and creating or joining state cap-and-trade programs." The President's use of this "back door" power to push previously Republican-defeated legislation represents a huge win for CPST.

Continued Pro-Capstone Regulations at the State Level

On May 30, 2014, the North Carolina legislature gave fracking the final approval and the bill is on its way to Governor Pat McCrory who already indicated his intent to sign it. As investors who have read my previous articles know, fracking is one of CPST's biggest hits. Its flagship product, the C200, has been in the field for over 4 years and customers continually return for more. Thus, this legislation is an additional win for the company.

Comparison of Select Alternative Energy Companies

Some readers have asked me to compare Plug Power (NASDAQ:PLUG) and CPST. The former has a Market Capitalization of $730 million and trades at price to sales ratio of 28, whereas CPST has a Market Capitalization of $468 million and a price to sales ratio of 3. At the same time, PLUG's backlog is approximately $80 million, which is less than half's of CPST's $171 million. Further, PLUG has a current stock price of $4.36 and an average price target by analysts of $4.88 and a high target of $6, representing an expected upside percentage move of 37%. CPST has an average price target of $2.25 and a high target of $2.70 representing an expected upside percentage move of 79%. While both companies are expected to benefit significantly from the regulatory environment, I strongly prefer investing in CPST. As addressed in my prior article, the pending congressional bill HR 4428 may give CPST a lottery ticket that would greatly increase price expectations. Investors seeking further information can watch the following informative video. In the video, Motley Fool's Tyler Crowe also discusses FuelCell Energy (NASDAQ:FCEL) and mentions that the Tax credit for fuel cells is expected to expire in 2016. Tyler notes one of Capstone's advantages over fuel cells is that Capstone has more diverse product offerings and its products are cheaper on a price per kilowatt installed basis, thereby giving Capstone a 20% price advantage over fuel cells. Tyler also notes that Capstone's addressable market is $1.5 Billion.

Existing Market Acceptance, Product Innovation and Updates on Upcoming Earnings Call June 12, 2014

CPST's products continue to receive widespread market acceptance and that acceptance should increase due to the aforementioned regulations and the company's continuing product innovation. Recently on May 29, BPC engineering, a Russian distributor for Capstone, launched its microturbine power plant using Capstone turbines to power Pskov Bakery which is the largest enterprise of the food industry in the Pskov region. You can read the following press release if you transfer to English via your browser.

Investors should expect to hear further developments on CPST's earnings call on June 12, 2014, in which the company will update investors on its products. First, we should expect discussion on the upgrade of its C200 unit to the C250 - that will produce an additional 50kW of clean power and raise fuel efficiency from 33% to 35%. The C250, developed through a cost-sharing program with the U.S. Department of Energy, will allow Capstone to manufacture its C1000 Power Package with four C250 microturbines rather than five C200s, and significantly limit component costs, translating into higher margins for CPST. Secondly, the company will discuss its C1250 product comprised of five C250 microturbines. And finally, Capstone intends to produce a C370 microturbine that combines a low-pressure C250 spool with a second spool - similar to an aircraft engine - that will allow a higher pressure ratio to produce greater efficiencies and power densities. In fact, efficiency of the C370 is projected to near 42%, one of the highest in the industry.

As usual, the street analysts should participate on the earnings call. As investors know from my prior articles, analysts have upgraded Capstone to "buy" and substantially raised price targets this year from $1.90 to $2.70 and from $2 to $2.50. I expect those analysts to reiterate their ratings after the earnings report given a few factors:

  1. Extreme sell off of over 40% from Capstone 52-week high of $2.60 in March of this year
  2. Highly favorable, dramatic changes in the Regulatory Environment.
  3. I suspect the recent capital raise will assist the company to address its record backlog and I expect the company's CEO, Darren Jamison to comment on that. Mr. Jamison recently stated that Capstone's crossover to positive EBITDA and cash flow is forthcoming.
  4. Updates on the company's partnership with Peterbilt for the Walmart (NYSE:WMT) trucks and Wrightspeed for FedEx (NYSE:FDX) and Waste Management trucks.

Conclusion

Capstone preliminary earnings were released on May 7th after closing an equity offering of 18.8 Million shares, starting a downward trend below $2 a share on a relatively small dilution (refer to my previous article for details). I believe that there are very few, if any remaining negatives to create downside, only leaving positives announcements from the company and likely positive remarks from analysts that will in turn drive the share price higher.

Short interest in capstone has grown 9% from 47 Million shares to over 52 Million representing about 18% of the float and the stock price has gradually been moving higher on a weekly basis over the past 2 weeks reflecting a bottom has been made and a new uptrend has started on the technical side. Looking at a 3 month-daily chart, the volume by price indicator is most significant at the $2.15 level. Given the aforementioned developments and near-term expectations, I believe the stock will rally back towards the $2.15 area in the near term.

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. There is no guarantee of performance and investors should consult with a qualified investment advisor before investing.

Source: Expecting Continued Increase In Capstone's Share Price