Analysts See Value In CPST

Capstone Turbine Corporation (CPST) develops, manufactures, markets and services microturbine technology solutions for use in stationary distributed power generation. CPST's share price started the year at $1.63 and hit a high of $4.42, but it has sunk down to just $1.21 and offers a major buying opportunity.

As per its latest 10-Q filing, CPST has no long-term debt and has about $32 million cash on hand [Ed.: This is corrected from an earlier, incorrect version.]. CPST also has a yearly growth rate of 37%.

Institutional Holdings have risen sharply as institutions have increased their holdings by 60% over the past 6 months to over 69 million shares, thus adding over 26 million shares to their positions.

CPST is extremely undervalued at the current price. It would be a smart time to load up as most likely the share price will not stay this low. I expect that it will soon move back above $2 and test the 50 day moving average of $2.14.

On September 18th CPST announced an equity offering of about 21 million shares of common stock, or about 20% dilution. CPST is a unique energy company that has an extraordinary backlog of orders, and the additional capital was needed to fill the orders. Once the orders are filled, CPST will have a nice revenue stream which it can reinvest to produce more of its cutting edge C200 and C1000 microturbines.

The shares were sold at $1.36, which caused a drop from the $1.80 range the day before. However, in my opinion, the equity offering was a smart move to CPST's alternative of issuing debt. The company does not have any debt service payments, and it can recycle its revenues to pump out the backlog of its orders.

Furthermore, per the polls, if Obama wins that would be good news for CPST. As we all know, Obama is a strong supporter of alternative energy solutions including microturbine systems. This would be tremendous for CPST, and we could expect more spurts of legislation in favor of micro-turbines.

If one considers that the average analyst price target is $4.50 per share and then one takes into account the 20% dilution, one could estimate the average target is now $3.60 per share.

Notably, five analysts started coverage of CPST in 2008, and they are all very bullish. Here are the latest analyst opinions in reverse chronological order:

July 10, 2008

Wachovia initiates coverage on Capstone Turbine with an Outperform rating and a $4.80 to $5.40 valuation range. The firm said, "Thanks to rising energy prices, growing environmental concerns, and an increasingly unreliable power grid, we see strong growth prospects for the global use of distributed generation [DG].

In our view, Capstone's microturbines represent some of the best DG products available. With the introduction of its new, larger (C200 and C1000) units, we believe Capstone is well positioned to take a sizeable share of the market for DG products in the 30kW to 1-10MW range."

June 26, 2008 

Broadpoint Capital initiates covearge on Capstone Turbine with a Buy and $6 price target, saying larger microturbine systems could be a game changer.

June 14, 2008

Ardour Capital reiterated accumulate and raises target to $4 from $3.

May 19, 2008

Northland Securities Reiterated Outperform raises target to $5 from $2.

May 12, 2008

Merriman Curhan initiates coverage on Capstone Turbine with a Buy, saying the company is positioned for long-term growth.

It is interesting to note that all of the above recommendations were made when CPST was trading well north of $2 per share, or at least 60% above the current price.

If you read my articles, you know that I typically find companies that either the analysts have overlooked entirely, or that are selling at a deep discount from where the analysts recommended it. This time, five analysts recommended the stock at much higher prices.

But, as a bargain hunter, I chose to buy this stock at this level and at this time after the company secured its financing. Investors are running scared and, to me, that is even more of an indication why this stock seems more than ripe for the picking.

Disclosure: Starting new position

Comments

[jjensen12:]

I own it in our custom portfolio and through calls. I have followed the company for over 6 years and I believe that this is probably one of the best buying opps for this position. They have many areas (product-wise) that are just now being sought out by companies and govt. Great job on the article. It brings to light the fact that the backlog could/should turn to profitability sooneer rather than later. If my info is correct, the offering priced warrants around 1.92 for 5 years and about 1.49 for the common. And, it seems it went through very easily in this credit envirionment. That tells me that there is significant upside to this position.

2008 Sep 28 12:14 PM

[apppro:]

I agree with everything you say, but when no one else does what does it matter. This market is so controlled by shorts that most good to great companies are still held back.
And the equity offering occured because of our creidt crisis and banking fiasco - another short created disastor.

2008 Sep 28 12:47 PM

[CPST1:]

The 9/18 equity offering should be for the addition of robotic welders ($15 ml) to the production line. At least that was noted during the 1st Qtr 09 conference call on 8/11/08 as something they would like to have although no such offering was alluded to.

At present they are nearing 50% production capacity meaning they have more space to utilize to reach the limit of how many units they can turn out. Only the “actual sales” that were delivered against, or are in current production schedule were reported as earnings in 1st Qtr 09. The back orders however, equal the sales of the current production cycles.

Vendors are being asked to deliver materials in shorter cycles and that is why the back log has occurred.

Coupled with the need for robotic welders and innovation, they have also added additional shifts to the production line. The units are sold through distributors’ world wide.

The utility of diversification as to how the micro-turbine co-generator (CHP) can be configured has more potential than it is currently most widely used for. www.capstoneturbine.co...

You would buy these units today to meet and solve the energy crisis of tomorrow. They are green, lean and quiet. All units utilize very few moving parts and are NYC building certified for indoor or outdoor installation. They have a significant presence in and around NYC.

www.officepowerllc.com...

Used units and technical background knowledge in addition to installation procurement is available through Microturbine online.

www.globalmicroturbine...

There is limited residential application and most notably is offered for commercial office building spaces. Still though, many units are stand alone used on offshore oil platforms, or remote oil and gas fields. Units co-generate heat, a/c, or electricity. They are efficient when installed in series or parallel to grid application. Some have griped that the electrical output could be greater. In this regard, one should expect progress to be made when using natural gas as its fuel source. Otherwise, they are multi-fuel friendly and easily maintained with excellent uptime.

Units are running in public transportation mass transit systems. Another area of further business elaborations.

The stock does not move with "good news." Though, Capstone should be recognized as an able and well managed company that could likely withstand higher degrees of mass production staffing, and be managed more like a mini-United Technologies than a manufacturing facility. They continue to face growing pains.

Accumulate/long CPST

2008 Sep 28 02:56 PM

[Scott-ATA:]

So the 20 million in current liabilities isn't a debt. Seesh get your facts straight. You say it's undervalued, but you don't say how or why. Instead you quote some analysts who probably have positions in this stock. I do have a position, but at least I can read a 10-Q

When the facts are that CPST has no LONG TERM debt and actually has 32.667 CASH, the rest is in Inventories, Prepaid expenses, and accounts receivable.

Ask any accountant and they will tell you that cash does not equal inventories, prepaid expenses, or account receivable, and that there is a reason they are separated on the balance sheet.

For those that are really serious about CPST, please AT LEAST read the 10-Q. Jeremy, I think you might want to read this too

www.sec.gov/Archives/e...

2008 Sep 28 10:23 PM

[clu.invesment:]

growinggreen has it wrong = foolish shortseller along with scott both holding CPST short

2008 Sep 28 10:58 PM

[clu.invesment:]

CPST is in the sweet spot that is why they sold 21M shares for $29 M dollars = $1.36 a share yes the fund gets the warrants but they are only worth money if the stock is above $1.92 a share. FOLLOW the smart money. The fund knows CPST has a bright future. Buying now offers a huge discount. CPST will test $5 next year. Ignore the shorts and bashers they want it cheaper But not for long CPST has the products watch for major news soon. BUY and HOLD or miss out.

The World needs Energy and CPST has a great source.

2008 Sep 28 11:05 PM

[Malanthus:]

Scott ATA, before you get too snarky with the author. You might want to consider what the recent secondary offering did to the balance sheet.

32 million + 29 million = 61 million cash on hand.

2008 Sep 28 11:31 PM

[mbr:]

There is no C1000 microturbine but Capstone offers a combination package of five C200 microturbines held in one container. Smaller combinations are also offered. The Capstone microturbine is an advanced product without competition. Large profits will follow in due course.
Long CPST

2008 Sep 29 05:47 AM

[Tim Plaehn:]

This is one of those stocks that has great prospects but has yet to generate a profit. I have found that the jump to profitability is the step many small caps fail to make and end up breaking the shareholders. I try to wait until a company show it can generate ongoing profits and if the growth potential is there, buying opportunities will provide excellent returns for investors.

2008 Sep 29 08:38 AM

[longtermstocks:]

GO CPST !!!!!!! I have been long for 8 years, make Daddy some $$$$ . I am buying more.

2008 Sep 29 09:38 AM

[10Q Detective:]

Will Financing Engine Seize-Up at Capstone Turbine?After years of hype, can Capstone microturbines finally offer economic advantages over other emerging distributed generation technologies, such as fuel cells, solar power, and wind-power systems?industry.bnet.com/ener.../

2008 Sep 29 12:40 PM

[biff johnson:]

Capstone needs to get off the pot and start doing something to become profitable. i'm tired of feeling like a bagholder!

2008 Sep 29 12:46 PM

[biff johnson:]

Capstone needs to get off the pot and start doing something to become profitable. i'm tired of feeling like a bagholder!

2008 Sep 29 12:46 PM

[Scott-ATA:]

I am actually LONG CPST, and Malanthus, until CPST announces how much they have made from the equity sale, they only have what is reported on their latest 10-Q as cash on hand. How do we know if anyone even bought it? Or how do we know if they did better than expected? Simple, we don't. And until IR announces how the equity sale went, saying anything other than what has been reported is simply a lie. He could have said 32 mil. + an expected 29 mil from the equity sale, but he did not.

Notice, the editor FIXED what I said was wrong.

Thanks.

2008 Sep 29 01:49 PM