Despite Backlog, Capstone Turbine Has Potential

| About: Capstone Turbine (CPST)
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Tuesday's earnings report from Capstone Turbine (NASDAQ:CPST) sent shares spiraling to as low as $1.30 during the remainder of the week, even while the company reported another quarter of record earnings numbers and growing backlog.

Revenue from sales in the quarter was $19.2 million, up from $18.9 million the previous quarter, and Capstone closed its fiscal 2011 with $106 million in backlog.

I've discussed before, that before investors can get too excited about the short to mid term prospects of this company making it to profitability, it would have to eat away at the growing backlog at a quicker pace, with due respect given to operating costs and margins.

The increase in realized revenue and number of orders being fulfilled between the fiscal third and fourth quarter of 2011 demonstrate that Capstone has made great strides in eating away at backlog and becoming more efficient at putting its microturbines on the street.

However, the increase in output and demand for new orders has stretched the company's supply chain.

President and CEO Darren Jamison commented on this subject during Tuesday's earnings call:

"Unfortunately, some of our vendors struggled to meet this deep step change in production ramp over such a short period of time."

He went on to add that increased overtime, increased freight and expediting charges also impacted the quarter's numbers.

Shorter-term investors were disappointed when this quarter did not demonstrate quicker sales and margin growth, but the sharp decline in the CPST share price had more to do with the heavy short position that Capstone was carrying throughout the early part of 2011.

With that much short pressure on the stock, one had to expect that either a push to the downside was coming or, if news warranted, a squeeze to the upside.

Since the earnings report, while still very good for those looking at Capstone as a potential growth play in a high-demand market, did not come with blow-away numbers, it offered an opportune time to play the game for the shorts.

With increasing media attention and growing demand for its products, CPST has, in my opinion, entered into 'Buy' territory again.

There may be a lull in the action before this stock presses the two dollar mark again, but if the current sales and growth trends remain in tact, then CPST and its shareholders should still come out big winners.

Disclosure: I am long CPST.