Meet The Stock That Could Cripple Utilities

Our current energy debates are always geared toward new energy sources. Meanwhile, we overlook that our current electrical distribution method wastes 70% of its electrical energy before it gets to its final destination . The next transformation in the energy world won't come from more sources, but from delivering energy in a more efficient manner.

The pioneer of this transformation is a manufacturer of micro turbines that could completely change the way we energize our lives. The question is whether this small-cap company will go out of business before it can revolutionize the way we produce energy.

We can build it; we have the technology ... but do we have the free cash flow?
Capstone Turbine
(Nasdaq: CPST  ) , is the leading designer and manufacturer of co-generating micro turbines. The company designed a system built on small jet engines to create heat, hot water, air conditioning, and electricity on site that can potentially reduce total individual consumption of 40%. The addition of its air-lubrication technology results in a cleaner burn than traditional power generation and reduces nitrogen oxide emissions by 96%. These new developments could spur a move away from industrial distribution of electricity through the grid.

This is what the grid looks like today. At every transformation and transmission, we lose energy through heat. What a waste.

Source: U.S-Canada Power System Outage Task Force.

And this is what a decentralized system looks like. Look at how clean and efficient it is.

The second appealing aspect of Capstone's products is that they can consume a wide range of fuel types. Individual homeowners can choose from a wide variety of commercially available fuels -- natural gas, biogas, kerosene, jet fuel, or coal gas. For the more environmentally conscious, anyplace that can capture methane from the decomposition of organic material -- such as farms, landfills, and wastewater treatment facilities -- is now able to efficiently produce electricity. Turning our refuse into power. Now that is green thinking.

While some other big players, such as GE (NYSE: GE  ) and United Technologies' (NYSE: UTX  ) Pratt & Whitney, are also designing co-generation solutions , they do not have as strong of a product as Capstone when it comes to small-scale use. The smallest offering from Capstone is one that could fit the needs of a small home, whereas the competitors are built for hospitals and other larger buildings.

With a leading technology in what could be considered an emerging market, Capstone should be printing money. Alas, not even close.

Capstone Turbine

FY 2012

FY 2011

FY2010

FY2009

Net income

(18.76)

(38.47)

(67.24)

(41.72)

EPS

(0.07)

(0.16)

(0.34)

(0.25)

Operating Free Cash Flow

(21.44)

(21.9)

(34.63)

(55.53)

Source: Yahoo! Finance. All numbers in millions, except per-share data.

While it looks pretty ugly, the numbers are slowly getting better each year. Based on these trends, it's possible that this long foray on the red side of the ledger could come to an end in fiscal 2013. Miraculously, despite all these losses, Capstone has been able to remain debt-free. The company did so, however, by raising capital through stock issuance -- not always the best news to hear as an investor.

The world of tomorrow ... waiting for people to open their wallets
This transformation will not be easy. Adapting this type of product requires heavy upfront switching costs, which can be hard to justify in a slow economic environment. Not all is doom and gloom, though. Capstone has been courting a friend in remote generation for oil and gas exploration. Big upstream oil and gas producers Chesapeake Energy (NYSE: CHK  ) and EOG Reources (NYSE: EOG  ) need to power their off-grid operations production at their Eagle Ford shale operations, and they are looking to Capstone to provide solutions . These deep-pocketed energy companies have ordered 150 generators for the shale play over the past year. Capstone has also just secured deals with Gentalta Power in Canada and with the Mexican government .

When considering Capstone as a potential investment, please take note that this stock currently trades around $1.00. The company has negative earnings, and therefore no P/E ratio. It's young and trying to find profitability -- so this could be a wild and bumpy ride for an investor. If you're willing to stomach some volatility, though, this stock could have some major upside potential.

If you're looking to get into the game in decentralized generation but are more averse to volatility, I would look to GE. The Motley Fool has produced a full premium report on GE that outlines its potential growth outlets and the potential risks in the future; click here for the full report.

Fool contributor Tyler Crowe has no positions in the stocks mentioned above, but he does like to spark up a conversation about new technology.  You can follow him on Google+ or Twitter, @TylerCroweFool.

The Motley Fool owns shares of General Electric and has options on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 15, 2012, at 9:04 PM, kthor wrote:

    how much does one 1 cpst micro turbines cost?

  • Report this Comment On October 16, 2012, at 11:16 AM, crankyolfart wrote:

    Capstone shouldn't be looking to replace existing, they should be targeting new construction: Housing developments, hospitals, schools, etc. and working with architects on large scale buildings... there's a world of potential outside of oil and shale plays.

  • Report this Comment On October 17, 2012, at 12:54 AM, tondog9070 wrote:

    This is kind of a "weird" article...for the sake of argument assume that one could get on site power distribution at any power required (such as multi MW for larger consumers). That non with standing micro-turbines such as Capstone's produce power at a thermal eff in the high teens to low 20% range. So you are already producing power 50% less efficently (20% vs. 30%) than a traditional grid distribution system using a large critical point coal fired boiler or recurperating gas turbine (which as you said lose about 70%) of potential power btw engine eff & distribution loss. Attempting to do something with waste heat is a bit futile since "waste" only only results due to engine inefficency any way.

    There are a multitude of other reasons why local power distribution is a non starter but why bother with physics; let Capstone's business performance or lack there of speak for itself.

  • Report this Comment On October 19, 2012, at 11:04 AM, tedwarrenlives wrote:

    Management seems to hand out raises to themselves? Yet the company is not profitable.

    CPST has been around for 2 decades yet they haven't been able to reach profitabiity.

    It is having trouble staying above $1 and with that delisting enters the equation or a reverse split.

    I am not interested in companies that are not shareholder friendly.

  • Report this Comment On December 30, 2012, at 6:35 PM, RedScourge wrote:

    A few highly efficient power plants producing energy from fuel and transmitting it across great distances via lines is usually far more efficient than carting tons of tiny loads of fuel by truck or train to a series of small and less efficient plants right near the demand center. If you offload the inefficiency of the energy transmission to the fuel transportation phase, you're not saving any energy, infact you're spending a great deal more of it. The idea that CHP is going to increase energy efficiency is nothing more than pseudoscience.

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