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Summary

  • Capstone Turbine shares took a massive beating after its latest results as the company suffered due to delayed shipment requests.
  • Capstone, however, will benefit from its participation in the Bakken shale.
  • Capstone is winning new orders at a good pace.
  • Capstone's focus on innovation should help it get better in the future.

Microturbine technology solutions provider Capstone Turbine's (NASDAQ:CPST) results have been disappointing over the past two quarters. The company ended fiscal 2014 on a negative note, and when it reported fiscal 2015's first-quarter results, the story remained the same. Capstone Turbine announced revenue of $23.3 million, down from $24.4 million in the year-ago quarter. It also posted a net loss of $6.8 million, flat from the year-ago period.

Capstone's results were below expectations, and its shares fell more than 13% after results. Delayed shipment requests for installation and delivery of equipment on project sites led to surplus finished goods at the end of the quarter, and hurt Capstone's results. The fluctuation in the timing illustrate the slowdown of its business on a quarter-over-quarter basis.

In addition, there was decline in the number of new orders as compared to the previous quarter. Hence, it is not surprising to see that Capstone has dropped massively in the past six months. However, considering the company's expected growth rate over the next five years, it makes sense to take a closer look at Capstone and see whether it is a good buy on the drop.

Looking beyond the short-term

According to management, Capstone's product pipeline is robust due to long-term secular trends due to growth in distributed generation. Capstone had approximately $175.2 million of order backlog at the end of the previous quarter. Further, the company received many new orders from its partners during the quarter. These customers include Seven Turbine Power, PipeLine Supply Company, Brightergy, and many more. The increase in new orders reflects the company's successful efforts to diversify its business.

Just recently, Capstone received a 5.5 megawatt order to upgrade two sports centers in Russia. All these indicate that Capstone is moving in the right direction, and strong customer diversification will allow it to reduce dependence on any particular source of revenue.

Capstone is keen on making the most of the mostly untapped Bakken shale play in North Dakota. It is also focused on tapping the oil and gas markets in Oman in the Middle East, coupled with expanding into Finland and Indonesia.

Opportunity in the Bakken

Capstone has recently partnered with Vergent Power Solutions for distribution, with the latter handling the Bakken shale play. At present, the Bakken is believed to have emerged as one of the primary sources of oil in the U.S. The drilling and production for new Bakken is concentrated in North Dakota. However, the operations also extend to Saskatchewan, Montana, and Manitoba.

Bakken produced greater than 10% of the entire U.S. oil production during 2013. There is a projected production of 1 million barrels per day of oil by Bakken in both Montana and North Dakota. Moreover, North Dakota has now become the second-largest oil-producing state in the U.S., and this is good news for Capstone as its turbines will find more demand due to booming oil production.

The order book is growing

Capstone has bagged an order for 25 C65 microturbines, approximating 1.6MW, to be utilized in several commercial industrial combined heat and power (CHP) and oil and gas applications in the Mid-Atlantic United States.

Moving on to the Middle East, Capstone has captured a key order from the PipeLine Supply Company for serving Qatar and Oman. Oman has selected Capstone's microturbines due to their efficiency in flare-gas-to-power projects. This order can be considered to be a big one, accounting for a number of microturbines to be potentially installed for assisting Oman in lowering its gas flaring. In addition, Capstone is focusing on the transportation markets, and is witnessing good traction from many new boatbuilders in the marine market.

Research and development initiatives

Looking ahead, Capstone is primarily focused on enhancing turbine performance, building materials technology, and upgrading its products to comply with the new European grid interconnect standards. The U.S. Energy Department is a tactical partner to support materials in the C370 microturbine program. The company is keen on improving the architecture, and enable the selection of its components for the integrated dual spool system.

Capstone's research and development team is working jointly with European distributors and European certification agencies to enable new standards for grid interconnect. The company expects higher investments in new high-efficiency technologies through reduction of initial capital deploying costs for energy efficiency systems.

In addition, Capstone is also focused on driving innovation. As I mentioned in my last article:

"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 (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."

Fundamental view

Capstone Turbine is not a profitable company yet. As a result, it doesn't have a trailing earnings multiple. However, the company has a forward P/E of 31.75, which looks impressive considering that its bottom line is expected to grow at a CAGR of 25% in the next five years. The company also has a decent balance sheet with $46.7 million in cash and just $12 million in debt. The liquidity position is also strong as a current ratio of 2.11 shows us.

Finally, the company's business is gaining traction, evidenced by new order wins. Hence, even though Capstone Turbine has taken a massive hit in the last six months, dropping almost 35%, it can still deliver growth in the long run. As such, investors should consider capitalizing on the stock's weakness.

Source: Capstone Turbine: A Strong Order Book And R&D Moves Make It A Smart Investment