Does Capstone Turbine Measure Up?

Margins matter. The more Capstone Turbine (Nasdaq: CPST  ) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. Healthy margins often separate pretenders from the best stocks in the market.  That's why I check on my holdings' margins at least once a quarter. I'm looking for the absolute numbers, comparisons to sector peers and competitors, and any trend that may tell me how strong Capstone Turbine's competitive position could be.

Here's the current margin snapshot for Capstone Turbine and some of its sector and industry peers and direct competitors.

Company

TTM Gross Margin

TTM Operating Margin

TTM Net Margin

 Capstone Turbine

(2.5%)

(47.2%)

(29.9%)

 Cummins (NYSE: CMI  )

24.0%

9.5%

7.9%

 Caterpillar (NYSE: CAT  )

26.5%

9.4%

6.3%

 Ingersoll-Rand (NYSE: IR  )

28.1%

9.2%

4.6%

Source: Capital IQ, a division of Standard & Poor's. TTM = trailing 12 months.

Unfortunately, that table doesn't tell us much about where Capstone Turbine has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months, the last fiscal year, and last fiscal quarter. You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for Capstone Turbine over the past few years.

Source: Capital IQ, a division of Standard & Poor's. Dollar amounts in millions. FY= fiscal year. TTM = trailing 12 months.

(Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them.)

Here's how the stats break down:

  • Over the past five years, gross margin peaked at -12.1% and averaged -21.1%. Operating margin peaked at -71% and averaged -134.2%. Net margin peaked at -94.9% and averaged -137.9%.
  • TTM gross margin is -2.5%, 1,860 basis points better than the five-year average. TTM operating margin is -47.2%, 8,700 basis points better than the five-year average. TTM net margin is -29.9%, 10,800 basis points better than the five-year average.

With recent TTM operating margins exceeding historical averages, but still negative, Capstone Turbine looks like it still has a lot of work to do.

If you take the time to read past the headlines and crack a filing now and then, you're probably ahead of 95% of the market's individual investors. To stay ahead, learn more about how I use analysis like this to help me uncover the best returns in the stock market.  Got an opinion on the margins at Capstone Turbine? Let us know in the comments below.

Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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 (8) | Recommend This Article (6)

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 March 03, 2011, at 10:59 AM, SUPERMANSTOCKS wrote:

    Capstone has a very interesting story to it, I will be watching this one for the next couple of months

  • Report this Comment On March 03, 2011, at 11:00 AM, wireboy57 wrote:

    I like Capstone due to all of the follow on orders from the Eagle Ford Shale Play in Texas.

    There's a map of the massive Eagle Ford Play here:

    http://thebuyerwire.com/?p=142

    Capstone has gotten three separate orders from a yet to be named oil/gas co. operating in the Eagle Ford. This could be a huge application for the co.

  • Report this Comment On March 03, 2011, at 12:25 PM, bottomfisherman wrote:

    Oh a rhetorical question, the answer is of course yes. Investing is about looking forward and finding potential, where it has been is fine where it is going is much more important. Am long with real money and will continue to accumulate CPST.

  • Report this Comment On March 03, 2011, at 3:02 PM, wireboy57 wrote:

    Here's an update to the Eagle Ford angle for Capstone that I posted earlier. This new article lists the top ten oil and gas drillrers in the Play--and suggests that they are all possible Capstone partners going forward.

    http://thebuyerwire.com/?p=230

    Long CPST and expecting a nice run into summer. GLTA

  • Report this Comment On March 03, 2011, at 6:15 PM, JiminNJ wrote:

    I've been adding CPST as I adjust some of my other positions.

    I think it could double without much trouble.

  • Report this Comment On March 04, 2011, at 9:50 AM, aaarruf1 wrote:

    I am long on Capstone, and consider that they will be a huge success in the near future.

  • Report this Comment On March 04, 2011, at 4:04 PM, bottomfisherman wrote:

    Yes up 9.27 percent today with real money!!!

  • Report this Comment On March 05, 2011, at 3:20 PM, mettyeddy wrote:

    Watch a few times every day, so my faith is not rock solid - nonetheless, long with real cash.

    I dug in deep on the research and really liked this real-world multi-use product (dudes, check out the one-off hybrid range-extended CMT-380 w/ 0-60 under 4 sec!) and the fuel flexibility (esp with domestic NG).

    ~10% bump within two weeks of my buy gave me a warm fuzzy. :)

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