The Long Case for Capstone Turbine 21 comments
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Capstone (CPST) develops and manufactures fuel agnostic (gas or liquid: Low Pressure Natural Gas, High Pressure Natural Gas, Compressed Natural Gas, Diesel, Gaseous Propane, Kerosene, "Sour" Gas, Landfill Gas, and Digester Gas.) microturbines for commercial and industrial use. Their turbines range from 30 kilowatts to 1 Megawatt. For reference, 1 MW will power approx 250 homes or a good sized office building.
Capstone was started in 1988 and originally planned to concentrate on smaller turbines, using their patented air bearing technology, to develop power for the hybrid transportation market.
The company went public in 2000. The previous management team built an expensive, expansive, state of the art, US based, manufacturing facility with robotic welding equipment and sophisticated software systems, and consequently, the business is currently faced with high fixed costs that have kept the bottom line in the red despite significant top line improvement.
Under the new management team, the business focus has shifted to providing more powerful, energy efficient, emission reducing, cost controlling equipment to many different, larger, end markets.
Those markets include:
- The oil and gas industry: Capstone sells their turbines for use on offshore oil & gas rigs. The turbines reduce costsas they require very little maintenance. Service is needed after 40,000 hours of operation whether it’s intermittent or continuous. In addition, the flared gas that is usually wasted can be used to fuel the turbine, reducing power costs.
- Large retailers, hospitals, schools, office buildings: Capstone's turbines can be used as either a backup or a primary power system. It can be used for combined heating and power or combined cooling heating and power (currently used in the downtown Manhattan Marriott and at least one midtown Manhattan office building as primary power).This offers a cost reducing, environmentally friendly, reliable, alternative or co-generation power solution. As a backup power solution, Capstone's turbine replaces a bulky, diesel powered, environmentally unfriendly, backup system that needs to be carefully maintained because of all its moving parts and needed lubricants. Capstone's turbine has one moving part, and because of its frictionless air bearing, does not require any petroleum based lubricants or any coolants.
- Digesters and landfills: Methane gas is normally wasted/flared off. Installing a Capstone turbine that can run on the methane reduces costs and pollutants.
Bottom line is that Capstone is an under-followed small cap clean technology play with a new, highly qualified management team, proprietary technology, and an attractive fixed cost structure that will become highly profitable as it penetrates end markets that face rising energy costs, grid constraints, and environmental concerns.
Lastly note that Capstone most recently reported a cash balance of approximately $43 million, revenue up 60%, and a backlog that increased 458% yoy.
Disclosure: Author holds a long position in CPST
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This article has 21 comments:
installed at all fuel service stations that could use the fuel that
is sold . This will make everry service station in the many power outagges a reliable fuel fillup station.
If you want to install a unit (new or used) globalmicroturbine.com is a good online source.
All it takes is one good breakthrough in an alternative energy and Capstone is down for the count!
That being said, it is the tier 1 player in this space. No one else can touch its technology. One of its biggest obstacles has been its high fixed costs as the author mentions. They are however ramping up production, they have recently added a partial second shift and have hinted at a further ramp up. Listening to the companies conference call last quarter will reveal that CPST has been in direct talks with its parts suppliers to ensure that they will be able to ramp up production in order to meet their increasing demands.
Capstone's key to profitability is to increase the volume of its sales. People who claim CPST loses $ for every turbine they sell and then go on to claim that if they sell more turbines they will lose more money are completely ignorant of how fixed costs work. Or are blowing smoke up your bum for their own agendas.
Look at it this way, CPST has in place a sales team, an R&D team, a shipping team, a management team, a manufacturing team, offices around the world, parts/supplies etc etc. These all account for costs that, regardless of whether CPST sells one turbine or 150, the company will have to pay for. If you increase production using the same listed resources above, you would only have to increase spending a small percentage to cover increased labor needs and increased parts/supplies. All other costs will remain the same. So lets say CPST had produced 150 turbines, they double their workforce and now are producing 300 turbines. They have doubled their revenue while the costs of the operation more or less remain the same, only increased by the labor and parts increase. So the outcome results in better margins per unit.
As this is pretty basic accounting, and everything that I mentioned is pretty much layed out in their latest CC. I would imagine that some posters are trying to shake some shares out of the retail investor community by using scare tactics. I have seen a large spike in the "bashing" chatter on several message boards, Yahoo's especially.
I am just saying do your own DD before listening to what someone on a message board tells you.
This is definately a speculative stock with risk, but its also a diamond in the rough with a foothold in a lot of market. If they can make it through this rough patch, it should really shine in the long run.
Best of luck to all.
Total Revenue
2004, 2005, 2006, 2007 2008
12,607 16,968 24,103 21,018 31,305
Total Operating Expense
61,446 58,088 73,323 60,034 69,633
Operating Income
(48,839) (41,120) (49,220) (39,016) (38,328)
Revenue almost tripled in 5 years, and they moved operating loss from $48 million to $38 million annually. This company currently has $50 million in total equity, (half of which is equipment and machinery so the real number is probably more like $25 million) so it is set to lose its entire net worth over the next 12 months. Order backlog is up, which indicates that its overhead structure is not as deep as the previous post implies (if it has a deep overhead structure capable of increasing revenue with minimal incremental overhead increases it should be able to keep up with orders, revenue should be up, and backlog down). Since it is increasing order backlog, it is clear that the argument that it has massive production capability without increasing incremental overhead is questionable. Look, if you want to buy the stock, buy it. It was $0.98 a share a year ago, it made it to $4.40 June of 08 and at $2.5 August 08 there is a chance that news of a large order, supplemental offering, borrowing relationship, etc., will send it up towards $5. But there is also a very realistic possibility that it will revist the sub-$1 price it was sporting in August of 2007, and it may go down from there. My point is that this is a very risky investment and anyone looking at a long position on this stock should seriously look at the numbers.