Capstone Part 2: Bounding Towards Triple Value

| About: Capstone Turbine (CPST)

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Since the time of my previous article of July 13, 2012, there have been exciting developments for Capstone MicroTurbine (NASDAQ:CPST), all serving to reinforce my previously expressed view that the stock could triple in value. In fact, on September 5, 2012, a $2 target was initiated at Craig-Hallum, which exhibits confidence that the stock will double in value.

On CPST's earnings call of August 9, 2012, CEO Darren Jamison commented, "We are able to increase revenue year-over-year despite the challenging economic conditions worldwide due to two key factors: First, we continue growth in broadening of our distribution network; and secondly, the continued market acceptance of our new C200, C1000 Series microturbine products. Product revenue for the quarter was $23.6 million, up 13% year-over-year. New product orders totaled $24.1 million for the quarter, which, again, gave us a positive book-to-bill ratio. We shipped 25.1 megawatts, which was up 15% from 21.9 megawatts in the first quarter last year."

Edward Reich, CFO, informed, "Average revenue per unit increased to approximately $176,000 compared to $167,000 for the fourth quarter of fiscal '12 and $122,000 for the same period one year ago. These increases are the result of both higher pricing and a shift in mix for larger capacity products. Gross margin for the first quarter was $2.2 million, or 8% of revenue compared to $900,000, or 3% of revenue for the fourth quarter of fiscal '12 and $500,000, or 2% of revenue for the same period 1 year ago. The shift in mix to large capacity products increased pricing and lower material costs continue to drive improved gross margin. Capstone has now posted positive gross margins for 7 of the last 8 quarters. Most importantly, we again delivered positive gross margins, which we have now done in 7 of the last 8 quarters. Gross margins increased to 8% or nearly 600 basis points year-over-year as we realize strong sales volumes from higher kilowatt products and a 44% higher average revenue per unit while continuing to focus on reducing direct material costs."

The stock reached a 52-week high of $1.53 on February 7, 2012, and crossed above its 50-day moving average of $1.03 in intraday trading on September 13, 2012. Since my aforementioned article, the short interest decreased from 51 million to 49 million or 16.5% of the float, with institutions holding 40% of that float. I believe there is limited downside and a short squeeze is possible if the stock breaks above its 200-day moving average of $1.04.

Moreover, with $45 million cash and only $13 million in debt, CPST has a strong balance sheet. Considering the stock price, the company's performance, and the short interest, I expect CPST to make a strong upside move. Therefore, investors and traders in lower-priced stocks such as A123 Systems (AONE), GenOn Energy Inc (NYSE:GEN), FuelCell Energy (NASDAQ:FCEL) and JA Solar Holdings Co., LTD (NASDAQ:JASO) should consider buying CPST, the only one of the aforementioned stocks with positive revenue growth and a positive forward P/E ratio. Without excluding the others as good speculative plays, CPST, with its apparent, impending turn towards profitability is well worth consideration.

Disclosure: I am long CPST. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Please do your own due diligence and/or consult with a qualified investment advisor before investing. I may buy or sell any of the stocks mentioned in this article at anytime.

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