Keep Your Hands out of the Turbine

Beware press releases that try to sound like news stories from third-party sources.

That's today's lesson No. 1 from Capstone Turbine (Nasdaq: CPST). Late Friday, management reported early on its Q3 numbers, saying, "The company said it expects revenue for the quarter of approximately $5.7 million, exceeding analysts' consensus estimate of $3.6 million."

There are a couple of things wrong with this picture, the first being that only two analysts follow the company, according to Capstone's own website. And then, of course, there's the unpleasant Wall Street reality that analyst estimates are often nothing more than company guidance in disguise. (In this version of the old Wall Street game, analysts are often spoon-fed numbers.)

So maybe Capstone isn't telling its pair of coverage analysts enough to keep them well-informed -- which we might take as good news, as in: Capstone plays its cards close to the vest. Or could it be that Capstone is letting the analysts get their numbers wrong to the south side? Why? So the company can show off by jumping over a low bar that they helped set down there at insect altitude? Let's hope it's not the latter, but the bragging about beating estimates has me pretty suspicious.

What's not a mystery is how lousy an investment Capstone Turbine is likely to turn out to be. Since Jim Cramer and other short-attention-span pundits touted it as an alternative energy play or recommended piggybacking on a reported Wal-Mart (NYSE: WMT) deal in the fall of 2005, the stock has cratered, taking 80% of shareholders' moola with it.

Hey, I tried to warn ya. So did my colleague David Meier, who knows a thing or two, or a thousand, about turbines because he used to build them at GE (NYSE: GE) and Rolls-Royce Allison.

The problems at Capstone back then were simple: It was burning cash like crazy because it had terrible margins. The problems at Capstone now are still simple: It continues to burn cash like crazy because it has terrible margins. In other words, it's like a whole slew of so-called alt-energy/alt-power plant companies out there, from Pacific Ethanol (Nasdaq: PEIX) to Ballard Power (Nasdaq: BLDP) and FuelCell Energy (Nasdaq: FCEL).

At Capstone, cash flow from operations was a negative $45 million for the trailing 12 months from the September 2006 quarter.

Doesn't sound so bad? It does if you look at revenue over the same period, which was only $24 million. That's right, Capstone manages to burn nearly $2 for every $1 it takes in on the top line. Over that same time frame, cost of goods sold was $29 million, which ought to really put that revenue press release in perspective. I mean, really, how hard is it to sell stuff for less than it costs you to make it?

The bottom line is that Capstone has been staying afloat by issuing millions in stock, and that's the rest of today's story. Capstone shareholders, who are already drowning in dilution, can expect the company to dump another 40 million shares on them, on an existing diluted share count of 103 million. Given the amazing degree to which current holders are being watered down by this latest offering (there are 20 million warrants in the deal as well), the only surprise is that the stock is only down 5%. It deserves to be trading for far less than that.

Beg to differ? Bring it to CAPS. Seth's currently No. 4 out of more than 20,000 rated players. Capstone's market cap is too small for the stock to be ratable, but you can still challenge Seth on a host of other companies.

Wal-Mart is a Motley Fool Inside Value pick.

At the time of publication, Seth Jayson had no positions in any company mentioned here. View his stock holdings and Fool profile here. Fool rules are here.