Is Capstone Turbine a Buy?

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When oil and gas companies need to power their operations, they're starting to turn to small turbine manufacturer Capstone Turbine (Nasdaq: CPST  ) , which is growing into an important supplier that can offer energy-efficient heat and power.

Buildings that use microturbines can use the energy they create in multiple ways. In the Four Seasons Hotel in Philadelphia, Capstone microturbines are used to generate power for the building, and heat given off by the turbines is used to heat water for hotel operations. This efficiency has led to some big signings in just the past few months.

  • BPC Engineering ordered 60 C30 microturbines for a pipeline in Kazakhstan.
  • A major oil and gas producer ordered 22 C65 microturbines for the Eagle Ford shale play in South Texas. This is the second order for the mystery customer, and repeat business is always a welcome sign.
  • The marine market has also taken notice. Capstone will be providing two C30 liquid natural gas turbines for a new "green ship."

Capstone has identified the Eagle Ford shale play as a major growth engine for the company. As companies like Petrohawk (NYSE: HK  ) and EOG Resources (NYSE: EOG  ) expand operations there, they need power sources at remote well sites. Capstone's pumps and services business has sold 20 MW of turbines in less than a year in the shale gas space, so Capstone should continue to grow as shale operations grow.

Margins matter
The problem right now is that Capstone doesn't have a profitable established business like Cummins (NYSE: CMI  ) , which makes similar generating engines. Revenue may have been up 51.1% last quarter, to $24.2 million, but gross margins were a tiny 3.8%. No business is going to be able to operate profitably with margins like that.

To make matters worse, there was just $27.5 million in cash on the balance sheet to end last quarter, and the company lost $8.1 million in the quarter. So, as much as I like Capstone's growth and intriguing place in the market, the company is going to have to pick up margins to become a buy in my mind.

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Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

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Read/Post Comments (3) | Recommend This Article (14)

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  • Report this Comment On May 31, 2011, at 11:58 AM, bsmknight wrote:

    As much as I like your articles I seriously question your intent on capstone. Are you trying to scare people so you can short sell? I have read several articles you wrote on this company and everyone I read mentions at the end some major failing despite the fact that there was positive news you conveniently left out to balance it. Yes you mention a couple of the most recent positives, but then you bring in bad news and sensationalize it. If you are going to do that, do the same with the good news or you are not providing balanced information. To be more specific lets look at the news you made sound so horrible. You failed to mention the fact that they had a positive cash flow last quarter from operations. Last article you wrote never mentioned that despite being weeks after the news was announced. You also failed to mention that this was the first quarter that they didn't have to look for a revenue source to continue to fund operations due to the positive cash flow increasing their reserves. As far as poor margins, Ill give you that, their margins need help, but to balance it you should have mentioned that they have had positive margins for 2 quarters now and have been increasing it each quarter. Whats more you should have mentioned that they have increased their price of goods sold and also reduced cost of materials and that over the next year that will work its way through the backlog to steadily continue to increase their margins. Will that make the positive, I cannot speculate either way but I can say it is a fact they have steadily made leaps and bounds from how sad the company was 4 years ago. Seriously, balance your articles better otherwise you are just causing a scare and then I have to wonder what your Real intentions are.

  • Report this Comment On May 31, 2011, at 11:59 AM, bsmknight wrote:

    * i mentioned positive margins in the article above, that was to be positive Gross Margins.

  • Report this Comment On June 01, 2011, at 2:01 PM, adriano22 wrote:

    I totally agree with bsmknight here. I am bullish on Capstone and think that this company is well positioned to become profitable as the revenue continues to increase quarter after quarter.

    Here is the address of my blog if you want to check what I have to say about CPST.

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