Is Capstone Turbine Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Capstone Turbine (NASDAQ: CPST  ) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Capstone's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Capstone's key statistics:

CPST Total Return Price Chart

CPST Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

92.7%

Pass

Improving profit margin

78.3%

Pass

Free cash flow growth > Net income growth

32% vs. 58.2%

Fail

Improving EPS

75.5%

Pass

Stock growth (+ 15%) < EPS growth

32.1% vs. 75.5%

Pass

Source: YCharts. * Period begins at end of Q2 2010.

CPST Return on Equity Chart

CPST Return on Equity data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

69.5%

Pass

Declining debt to equity

183%

Fail

Source: YCharts. * Period begins at end of Q2 2010.

How we got here and where we're going
Capstone puts together a strong performance by earning five out of seven passing grades, but it actually lost two grades since last year's flawless assessment. Capstone's free cash flow, which began at a higher level than net income three years ago, hasn't quite grown at the same pace as its bottom line. The company has also raised significant debt to finance its operations since last year. Is this scrappy industrial upstart on its way to green ink, or is the future still clouded? Let's dig a little deeper to see what Capstone is doing to improve.

Over the past few quarters, Capstone has done a good job identifying and supplying remote areas, such as oil and gas drilling sites, where access to the power grid isn't often available. Longtime Fool contributor Selena Maranjian notes that the company has secured several deals for its low-emission micro-turbines, and there's a healthy backlog of $136.5 million in orders. Capstone recently bagged a $6.4 million contract from BPC Engineering to deliver 100 micro-turbines for a Russian pipeline project, and also gained an order for 34 liquid-fuel C30 micro-turbines from DesginLine for Denver's electric bus fleet. The company has also gained a foothold in China with a contract, valued at more than $1.3 million, from two Chinese energy producers.

Fool contributor Tyler Crowe notes that the company has been diversifying from its traditional oil and gas turbine offerings to other generator applications. Earlier this year, Capstone installed a methane gas-fired micro-turbine, which produces electricity from coal-bed methane gas, at CONSOL Energy's (NYSE: CNX  ) gas processing plant. Capstone's also signed a major supplier contract to install several "dual mode" microturbines over the next two years, and recently appointed six marine distributors to expand its visibility in the marine market.

Fool contributor Rich Duprey notes that Russia's new regulations now require 95% utilization of natural gas, which is a huge market opportunity for Capstone due to the vast amounts of gas Russia has been (but no longer can) flare off as a waste product during oil drilling. That gas has to go somewhere, and Capstone's natural gas turbines are one way for drillers to meet the requirements while also ensuring their own energy needs are met. Capstone will also benefit from increasing liquids production in the U.S. -- the company secured 4.6 megawatts worth of turbine orders from two northeastern U.S. oil and gas producers this summer.

Putting the pieces together
Today, Capstone Turbine has many of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

More great ways to profit from the energy renaissance
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a comprehensive look at three energy companies set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 


Read/Post Comments (4) | Recommend This Article (4)

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 October 24, 2013, at 11:49 AM, Trumpace wrote:

    CPST has continued to disappoint earnings report over earnings report. True they should be hot but plain and simple they are not. We move up every time towards earnings, only to decline when the report comes out. I hope it is different this time.

  • Report this Comment On October 24, 2013, at 1:29 PM, DaPurl wrote:

    Alex: thanks for the report; but you did not recommend any action. I have owned Capstone since June 2000. I presently have @ 70K shares (avg. price. = !.29) Do I bail if earnings are not positive? Earl

  • Report this Comment On October 24, 2013, at 10:46 PM, lordsabio wrote:

    So what's the recommendation?

  • Report this Comment On November 19, 2013, at 12:18 PM, piggy60 wrote:

    I've got a target buy at $1.24. Expect volatility, and have a buy it and forget it mentality. This is probably a five year play. The Russian thing is very interesting, and could be a huge boon for the company. The micro turbine idea is also interesting for an auto fleet; however, I see more of an application in the big rigs, buses, boats and locomotives. Hydrogen is coming, but still a bit of a ways off, so this tech could fit the bill as a transitional alternative. While I'm going to buy, I'm only buying 500 shares. I want to watch this on a daily basis. The current news looks good, but the stock is expensive ... it will take a while for earning to catch up. If I see an appreciable dip, say something less than $1, I'll likely buy more.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2696986, ~/Articles/ArticleHandler.aspx, 11/24/2014 4:45:25 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement