Capstone Turbine Stalling Out

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Increased oil and gas production domestically hasn't had an impact only on explorers and producers. A variety of other businesses are benefiting, including Capstone Turbine (Nasdaq: CPST  ) , which provides power for drilling operations.

The company has ridden increased production to some financial success, but right now the company is still posting a net loss. Will conditions improve enough to make this a good investment?

Revenue during Capstone's fiscal third quarter was essentially flat quarter-over-quarter at $27.5 million. But improving margins and lower R&D costs meant that the company's adjusted net loss fell 18%, to $5.9 million, although GAAP losses widened from year-ago levels. Still, both results were worse than analysts and investors expected, and the stock has fallen further since the results were announced.

Management is expecting big improvements during 2012, with gross margins moving up toward 35%. If that prophecy comes true, the company would be reporting a profit even at today's revenue level. Pricing, cost reductions, and warranty-related improvements could drive the company to meet this goal, and if it can get there, this could be a big winner.

Cash is king
The issue for Capstone right now is the company's cash level. Cash on hand has fallen from $33.5 million on March 31 to $22.9 million at the end of last year. If the company can't improve margins rapidly and continues to post losses, I have concerns it could run out of cash fairly quickly, even though the cash level increased $2.6 million last quarter, because that was driven by warrants, not operating profits.

Drilling slow down
The rapid expansion of oil and gas drilling in recent years has helped drive Capstone's growth. But Chesapeake Energy (NYSE: CHK  ) , Quicksilver Resources (NYSE: KWK  ) , and others are starting to slow down expansion due to low natural gas prices. This could put a cap on Capstone's growth potential. Unless this trend reverses, Capstone investors could be in for some disappointment in coming quarters.

Don't buy just yet
If Capstone can improve margins, this could become a great stock value, but right now it's just too risky a bet. Revenue has grown YOY but new orders haven't kept up with revenue, putting future growth at risk. And continued losses will put a real strain on the company's cash.

Interested in reading more about Capstone Turbine? Click here to add it to MyWatchlist, and you'll find all of our Foolish analysis on this stock.

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.

Motley Fool newsletter services have recommended buying shares of Chesapeake Energy. 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 (2) | Recommend This Article (1)

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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 February 14, 2012, at 9:23 PM, lanceim59 wrote:

    CPST has been a loser stock for years. Their biggest problem is not being able to full fill their back log of orders to build turbines. This is the result of poor management. Next stop for the stock is 50 cents.

  • Report this Comment On February 15, 2012, at 12:31 PM, Scot00Mac wrote:

    Actually, the NG price decrease could help Capstone, as it makes operating the turbines cheaper. Obviously this applies to the customer installations not associated w/ NG production (non Shale Gas installations), and i haven't seen a breakdown of Capstones customers. However, from a quick reading of their press releases, it seems they have more and more penetrations into the hospitals, commercial energy producers, hotels, etc.

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