Capstone Turbine Makes Me Eat Crow

There are a select few companies that, if mentioned in bad light around here at The Motley Fool, mean an instant deluge of hate mail in the form of emails and article comments. Capstone Turbine (Nasdaq: CPST  ) is one such company.

I like my crow with ketchup
Back in late March I included Capstone Turbine in my weekly series, "3 Stocks Near 52-Week Highs Worth Selling," and cited that its penchant for losing money and depleting shareholder equity were reason enough to avoid the stock. Although I have been right to some extent -- the stock did fall from $1.95 to its current close of $1.06 -- I'm willing to admit that my long-term perspective on Capstone Turbine may be all wet. It's not easy to admit when you're wrong, but in this case, Capstone's second-quarter results released last night aren't nearly as dire as my prediction indicated back in March.

Capstone Turbine had average revenue growth of 27.7% over the past five years, and its results last night didn't disappoint either. Sales rose 46% for the quarter and $3.2 million sequentially as the company shipped 172 microturbine units. Ironically, this was actually a decline from the first quarter when the company shipped 174 units, but with pricing improving the company was able to increase sales and more importantly, margins.

The most impressive aspect of Capstone's report -- and the real reason I'm eating crow -- is based on the fact that it actually made money. Sure, $1.3 million, or $0.00 per share, may not seem like much, but this is, from what I can tell, the first profit Capstone has ever turned. Margins also came in at a record for the quarter at 6% of revenue, reversing years of losses.

...but I have been right before
Now don't get the wrong impression that I've made a complete 180 and decided to throw a buy recommendation behind Capstone, because I'm not quite there yet.

While a favorable product mix did help Capstone's margins, the main reason the company was able to turn a profit was because of a revaluing of the company's warrant liability that resulted in an $8.6 million gain. The company's operations would still have lost $7.2 million for the quarter. This is 15% better than the year-ago period and does show a steady rate of improvement, but the company has yet to demonstrate it can be operationally profitable.

I'm also not sold on the fact that Capstone can compete in a world where General Electric (NYSE: GE  ) and Caterpillar (NYSE: CAT  ) dominate. Even smaller turbine players like Generac Holdings (Nasdaq: GNRC  ) and Dresser-Rand Group (NYSE: DRC  ) could chip away at whatever share of the market Capstone winds up with.

Foolish roundup
I have to admit that Capstone has come a long way from the money-losing, shareholder-equity-destroying company it was five years ago. Still, it has some work left to do before I will remove that label in its entirety. Show me an operational profit from Capstone, and I'll show you a green thumb. Until then, I remain skeptical, but much, much less than before on Capstone's prospects.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He has eaten crow quite a few times this year. You can follow him on CAPS under the screen name TMFUltraLong , track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. 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 that's always willing to share a slice of humble pie.


Read/Post Comments (5) | Recommend This Article (83)

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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 November 10, 2011, at 11:55 AM, mjtrac wrote:

    Units is a silly metric, and hiding it with generic comments about changed product mix is silly as well.

    The company has switched from units of 30kW that don't make it much money to units of 200kW that make it money.

    The company also has an additional 7% of margin sitting in its backlog, which is priced higher than past shipments. And it asserts it has additional cost reductions due to cut in over the next three to four quarters.

    But thanks for admitting you were wrong, sort of.

  • Report this Comment On November 10, 2011, at 12:05 PM, mjtrac wrote:

    From CEO's closing comments at quarterly conference call:

    "Five years ago, they said the products were too small to compete in the megawatt world, and yet today, 75% of our $114 million backlog is our 200-kilowatt-based product. I think we've done a great job in marketing it as a C1000 and putting it into a single box, having it act like a single machine. We are definitely playing in the megawatt space, and as Shawn had said, your 250 is only going to make you more competitive in that space and the 370 even further.

    "Five years ago, they said we'd be unable to build the product to a positive gross margin, but today, we've posted our fourth positive gross margin in the last 5 quarters. So it wasn't that long ago around these calls talking about can we even get a positive gross margin? Now we're talking about how do we get to 35% positive margin? So what a difference 5 years makes.

    "Five years ago, they said you couldn't survive another year. Yet today, Capstone not only survived the last 5 years, but I'd argue we're thriving in a world where more mature companies and established companies are struggling."

  • Report this Comment On November 10, 2011, at 6:41 PM, prginww wrote:

    Now I know I went overboard in investing some 401 (k) in Capstone, but, I like their products for the future. I am into energy in a big way in my portfolio, but, also believe in "green" energy stocks for the future. CPST is chugging along, & I am betting on thier future. I have doubled down on them a few times. I made some short term $ on them last year, but, now have some substantial shares in them. This whole market is crazy, so, it takes gut wrenching bets sometimes. CPST is one of those bets. I hope the Japenese come knocking on their door soon, as I see a ot of potential for them in that area.

  • Report this Comment On November 10, 2011, at 9:24 PM, Indiscr33t wrote:

    Darren R. Jamison

    Great. It's my closing remarks. December 17 will be my 5-year anniversary at Capstone, and in today's world of daily headlines and quarterly earnings calls and what-have-you-done-for-me-latelys, sometimes it's nice to kind of step back and have a unique opportunity to kind of reflect over the last 5 years. So when I joined Capstone 5 years ago, the industry told me the company was dead and forgot to lie down. A lot of folks were saying that I was crazy; the company will be bankrupt within a year; the product was too small and too expensive to compete with the likes of GE and Caterpillar; the morale of the company was terrible; distribution channels in shambles; and people say the company never had a positive gross margin and never will. Some folks in the industry went so far as to even call the company Crapstone. When I reflect back in the last 5 years, it's definitely not the easiest road I've ever gone down, not achieved every goal we've set or kept every promise the team's made, but the global economy has been brutal and financial markets have been unkind. But if you think about it, the hard work and the combination of solid planning and dogged determination is starting to pay off.

    Five years ago, they said you couldn't sell Caterpillar against Cap, you couldn't sell Capstone against Caterpillar and GE. Our revenues have fallen to $21 million from $24 million in the prior year. Fast-forward 5 years and today we're announcing quarterly revenue of $27.5 million, more than what we did in an annual basis back then, and the trailing 12 months if you add it up is $99 million to $100 million in revenue. So an incredible growth from the last 5 years for the product that people said would struggle to compete.

    If you look at -- they said the morale was terrible, the distribution channel was in shambles. Today, we've posted our 18th consecutive quarter of year-over-year revenue on a quarterly basis. Great employee turnover is down to 4%. I mentioned in our distributor meeting, we have 95 distributors today; we had 20 distributors 5 years ago. Virtually all of them are seeing their businesses grow. They're reinvesting into Capstone. We probably had 100 folks representing the product worldwide outside of Capstone 5 years ago; that number is probably closer to 900 today. If you look at our pipeline that we see in the market continues to grow every quarter, and we've got a lot of very talented and entrepreneurial folks that are representing the product.

    Five years ago, they said the products were too small to compete in the megawatt world, and yet today, 75% of our $114 million backlog is our 200-kilowatt-based product. I think we've done a great job in marketing it as a C1000 and putting it into a single box, having it act like a single machine. We are definitely playing in the megawatt space, and as Shawn had said, your 250 is only going to make you more competitive in that space and the 370 even further.

    Five years ago, they said we'd be unable to build the product to a positive gross margin, but today, we've posted our fourth positive gross margin in the last 5 quarters. So it wasn't that long ago around these calls talking about can we even get a positive gross margin? Now we're talking about how do we get to 35% positive margin? So what a difference 5 years makes.

    Five years ago, they said you couldn't survive another year. Yet today, Capstone not only survived the last 5 years, but I'd argue we're thriving in a world where more mature companies and established companies are struggling.

    We're growing while other companies are shrinking. We are increasing prices while others are slashing prices. We're hiring while others are laying off. We're developing new products, whether it's a 250 to 370 or the C1000 hybrid UPS, while other folks are slashing their R&D budgets and stopping producing new products. We're working with the DOE. We're embracing political leaders, whether it's from the House or the Senate or here locally in California, and we're pushing for new policies while others are turning away from government and are frustrated with the government.

    Simply put, Capstone is thriving while the customers are just trying to survive. And I think I'm very proud of the progress of the company. I'm proud of the progress of our leadership team. I'm proud of our board and all of our Capstone employees that have made this incredible turnaround for the last 5 years. But I'm more proud of the future of our company and with the next several years we're going to bring as we hit our next set of goals, which include positive cash flow, profitability. I'm excited for the launch of our next round of new products, new innovative technologies, new markets, new distributors, new partners. If you've heard us [ph] talk about during the quarter, we went from a Wells Fargo $10 million bank line to a $15 million bank line. Well, Wells Fargo obviously believes in our product, in our company, our people, our leadership team to increase the size of that line. GE, agreeing to an extension of our relationship on the ORC product for another 3 years. Obviously GE agrees and understands that our technology, I think is very valuable and is happy with what we're doing with it.

    So I think overall, I look forward to the next several years, getting even more traction in this market. If you look at the overall market drivers, whether it's reduced emission bubbles, higher energy efficiency, more total efficiency of products, distributed generation, SmartGrids, for the most part, everything is going our way. I know the overall market conditions on a day-to-day are lumpy. It can be a little bit frightening. But in general, we see all of our markets, all of our efforts improving. The automotive market, with our truck suppliers, both Peterbilt and Kenworth is very exciting. We also look a lot from the transit side. We see more out of the DesignLine, more out of Trolsa [ph] Bus and some other bus manufacturers we have around the world. So I think all 5 of our market areas are growing, all 95 of our distributors are growing, and we'll just keep working our plan to reduce the costs and improve our warranty expenses and improve our average selling prices and get the company stronger and more profitable for the next several years.

    So with that, thanks everybody for listening and taking the time today and look forward to talking to everybody at the next earnings call. Thank you.

  • Report this Comment On November 11, 2011, at 11:31 AM, FRANKOK2014 wrote:

    I've stuck with Capstone stock for several years and am confident I will recoup my investment. I am somewhat concerned about the trucking and transit activities - from a safety issue - just hope that insurance coverage was increased. Fuel Cell and microturbine combinations for high combined efficiency can perhaps first be developed with military vehicles. The US Army had a project - status not known.

    There are many opportunities to work with other energy segments as natural gas will be the big player and it powers the turbines.

    Also hope they work more with United Technologies instead of just GE.

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