Seeking Alpha
Long only, long/short equity
Profile| Send Message|
( followers)

Summary

  • Capstone Turbine shares have declined massively in the past three months, but its long-term prospects are intact.
  • Capstone is delivering solid margin growth and is bagging new orders, and the trend should continue due to growth in oil, gas, and shipping markets.
  • Capstone's product development moves should help it benefit from new applications.
  • Capstone's earnings are expected to grow at a robust pace in the long run, giving investors more reasons to buy on the drop.

Although shares of microturbine technology solutions provider Capstone Turbine (NASDAQ:CPST) have gained around 7% this year, the company is not in the best of health. Capstone's fourth-quarter results were disappointing, with the company posting a loss. Moreover, its revenue increased just 3%. Consequently, it is not surprising that Capstone has dropped a massive 37% over the last three months. But, this could be a buying opportunity.

Better times ahead

Capstone is expected to grow at a fast pace in the long run. Moreover, management is undertaking various initiatives to bring the company back on track. In fact, Capstone was able to reduce its annual operating loss by 30% in the previous fiscal year, and it looks set to get better.

In the fourth quarter, Capstone bagged new orders worth $131.5 million, which helped the company improve its cash flow. It also managed to improve its gross margin by 500 basis points to 16% in fiscal 2014.

Capstone is looking to capitalize on the oil and gas market, which it claims to be one of the fastest growing and largest markets in the world. Along with this, natural gas production has experienced solid growth in recent years, and no slowdown is expected in the near future. According to management, "We are ideally positioned to serve all facets of this market including exploration, production, compression and transmission."

The gas turbine manufacturer has also expanded its business to new markets, where rising power needs are creating demand for more distributed energy resources. During the fourth quarter, Capstone experienced strong demand from Mexico for its industrial combined heat and power (CHP), and combined cooling, heat, and power (CCHP) systems. This was mainly because its solutions are delivering superior returns as compared to the less efficient onsite equipments.

New applications to drive growth

Management also sees strong opportunity in the transportation market, with special reference to HEV buses and trucks. Capstone has partnered with Wal-Mart (NYSE:WMT) to test its WAVE (Wal-Mart advanced vehicle experience) concept truck. The microturbine acts as a range extender in the series hybrid power train, and is one of the latest innovations in green truck technology. Wal-Mart is looking to double the efficiency of its fleet by 2015. According to a press release:

"In 2005, Walmart, one of the nation's largest private fleet operators, announced its goal to double fleet efficiency by 2015. Walmart trucks log millions of miles every year, so when it comes to sustainability and fleet efficiency, the goal is simple: deliver more merchandise while driving fewer miles on the most efficient equipment. As of last year, the company had achieved an 84 percent improvement in fleet efficiency over its 2005 baseline."

Hence, as Wal-Mart, and others, focus on delivering more efficiency with their vehicles, Capstone should benefit. A similar trend can be seen in the marine market as well, with the main focus on the small and midsize commercial ships where Capstone's products are needed the most.

Focus on delivering innovative products

Keeping in mind the opportunities that might arise ahead, Capstone is developing new products, which is a key component for sustainable growth. The company is in the second phase of testing its C250 turbine, which is expected to increase the electrical efficiency of its products by up to 42%. It has already received clearance from the California Air Resources Board (NASDAQ:CARB) for its emission levels, and will soon enter beta fuel testing by the end of this year. In addition, the company has partnered with Oak Ridge National Laboratory and built a new C65 recuperator with advanced Alumina-Forming Austenitic (AFA) Steel material.

According to management, "AFA offers superior oxidation and creep resistance to the commercial heat resistance steel alloys." Although the C65 is still in testing mode, this new alloy could be the answer for several high temperature applications at a significantly reduced cost. Capstone is also upgrading its existing product lines to match with the new low and medium voltage grid requirements in Europe. This would improve the smart grid capability of its product, and position Capstone for future regulatory changes, both in Europe and the U.S., along with other emerging markets.

Conclusion

Hence, Capstone's innovation moves seem impressive. However, since it is unprofitable, Capstone does not have a trailing P/E ratio. Its forward P/E is 34, which looks impressive for a company that's expected to grow its bottom line at a terrific annual rate of 25% for the next five years, better than the 17% industry average. So, investors should definitely consider making the most of Capstone's recent drop and invest in the stock as it looks well-positioned for the long run.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.