Why Capstone Turbine Corporation Stock Dropped 6% Today Despite Upbeat Earnings

Capstone Turbine's (NASDAQ: CPST  ) third-quarter numbers missed Street estimates, and that hasn't gone down well with the market -- the stock's down about 6% this morning. But considering that the microturbine maker hit new highs on its top line as well as gross profit, why is the market getting fidgety? Maybe investors need to dig deeper into the earnings report.

Are Capstone's machines losing weight? Image source: Company website

Take a good look at those numbers
Capstone appears to have done a decent job during the third quarter. Here's a quick recap of the key performance metrics. 

  • Capstone's revenue jumped 11% year over year to $37 million, which was a record for the company.
  • Gross margin expanded an astounding six percentage points to 20%, both sequentially and year over year, to hit record high.
  • Capstone halved its losses to $2.2 million year over year. But net loss per share was flat at $0.01 since the company repurchased shares under expired warrants in Q3 this year which increased its outstanding share count.

That pretty much sums up Capstone's third-quarter performance, and it looks good to me. The losses shouldn't have freaked the market out, because Capstone may still have some more quarters before it can turn profitable. But while above metrics give you an overview of things, they don't tell you the full story. To know whether the company is moving in the right direction or not, you need to know the following numbers.

  • Capstone's third-quarter-backlog value improved 7% year over year to $160.4 million, indicating a growing order book.
  • A book-to-bill ratio of 1.4 means that the company booked orders worth $140 for every $100 worth of orders fulfilled and billed during the quarter. Total order value was $40.5 million for the quarter, up 87% year over year. But, the company received orders for only 109 microturbines during the third quarter, compared to 137 units in Q3 2012.

So what does that mean? It looks like Capstone's sales volumes aren't growing, and the product mix is boosting the company's revenue. In other words, Capstone is selling more higher-wattage microturbines like C65 and C1000 (which are, of course, priced at a premium compared to lower-wattage machines) even as sales for its smaller machines are slowing down.

That's actually favorable from the profitability angle, since the company can generate higher margins even on low volumes. That's evident from the fact that Capstone's average revenue per machine rose 16% to $184,000 year over year during the third quarter despite a drop in the number of units shipped. 

Where's Capstone headed from here
Going forward, Capstone expects to break even on its operating earnings or earnings before interest, taxes, depreciation, and amortization (EBITDA) by the next quarter. Considering that the company needs roughly $40 million in revenue and gross margin of about 21.5% to break even, it looks feasible, which is great news for investors.

Capstone started 2014 on a solid note, judging by the number of orders it received in January. The lucrative and high-potential oil and gas market continued to be its largest and fastest-growing market, accounting for 59% of its total shipments during the quarter. So it looks like the company's top line should continue to grow at an accelerating pace, which should help it reverse losses and turn cash flow positive over the next few quarters.

More notably, Capstone wants to hit a gross margin of 35% over the next two years. The good news is that management expects most of it to be driven by cost reductions, and not higher selling prices. Whether the company will achieve the target or not is anyone's guess, but management seems to have some plans up its sleeves and sounds confident. And that sounds like a good reason to keep an eye on this company. 

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Editor's Note: Article previously included a section telling investors to pay attention to slowing orders of C200 turbines. Since the company now packages five C200's in a C1000, the logic was incorrect because more C200's are being sold, just not on an individual basis. The Motley Fool apologizes and regrets this error. 


Read/Post Comments (11) | Recommend This Article (7)

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 February 11, 2014, at 5:01 PM, dcopperman wrote:

    The c600, c800, and c1000 are all groupings of c200s. And they are talking about quoting megawatt orders. So if they're down to 19 c200s standalone, and are planning on improving the c200, it doesn't necessarily bode ill. One hopes, said the long term holder.

  • Report this Comment On February 11, 2014, at 5:53 PM, almo52 wrote:

    The Company has already publicly disclosed that the C250 will be 10% more costly than the C200 but since there is only a need for 4 to get to a C1000 there is an inherent 12% cost reduction coming for the C1000 when the C250 is launched later this year. Since the C1000 is and will be the predominant product shipped most of that will help reduce overall cost and give the Company an 7 to 9% increase in GMargin.

  • Report this Comment On February 11, 2014, at 6:33 PM, investisseuse wrote:

    The analyses above are impressive and there is nothing with which to disagree. I would just like to add that it is thrilling to own a company employing American workers in manufacturing. Bravo, I say. Bravo!

  • Report this Comment On February 11, 2014, at 11:07 PM, shawncorrigan wrote:

    i am a new investor,i believe in turbines and this company is impressive so-far. i have always looked for a way to replace pistons,maybe i will get my wish.

  • Report this Comment On February 12, 2014, at 11:13 AM, tonyaa wrote:

    your bias against capstone is very clear.

    why don't you compare PLUG with CPST against all your metrics and tell us which one is the better company to own

    the fact that you actually thought few c200 were being sold and not realizing that multiple c200 are used to make c600s(3) c1000(5) says it all.

    u don't understand the company and yet u offer a biased comentary

    boo for the motely fool

  • Report this Comment On February 12, 2014, at 12:14 PM, Nehams wrote:

    @dcopperman,

    Thanks for pointing that out about the C200 product line. I apologize to you and fellow readers, and have updated the post accordingly.

    While the C600 and C800 backlog numbers for financial year 2013 didn't improve much, C1000 saw near 28% jump in units. That's positive, considering that the series contributed a third to Capstone's revenue from turbines for the nine months ended Dec.31, 2013. Let's keep an eye on the company's plans to upgrade C200.

    Thanks,

    Neha

  • Report this Comment On February 12, 2014, at 12:17 PM, Nehams wrote:

    @tonyaa,

    I don't think the article is "against" Capstone in any way. I hope you've read it properly.

    As for the C200, see above comment.

    Thanks!

    Neha

  • Report this Comment On February 12, 2014, at 1:09 PM, jervy100 wrote:

    being a new investor myself i didn't take the article to be biased against capstone. it seemed positive to me.

  • Report this Comment On February 12, 2014, at 3:12 PM, nativestarmike wrote:

    What a blind and incompetent article this is. How can you not know that the c200 is the backbone of CPST products. To show you how completely blind you are to CPST-- the c200 that you, as an expert say is losing orders (something like only 19 ordered!!)-- in the past 6 weeks or so CPST has already announced 39 c200 ordered. As for the total units ordered coming in a bit light-- don't you know they are now selling mostly larger units that are made by daisy-chaining c200s together! A sale or order of a c1000 for instance is really 5 c200s.

    I think you were trying to write a balanced article, but what you really did was cast doubt on the core of CPST business, the c200 and sales in general-- all because you don't understand the fundamental facts of their products.

    You need to write a new article, with this new understanding of the company. Your teeny retraction is not enough to correct the damage you've done.

  • Report this Comment On February 13, 2014, at 12:43 PM, Redwood wrote:

    Thanks for the minor correction to this article, but you still have work to do as there is still a serious misstatement embedded in this piece, and you still draw an incorrect conclusion that reflects negatively and unfairly on the company. Regardless of your intent, these points must be addressed. The fair way to do it is to retract this article and issue a NEW one with the correct facts, and you need to state boldly, up front, at the TOP not the bottom of the article exactly where the discrepancies lie.

    You state, "… the company received orders for only 109 microturbines during the third quarter, compared to 137 units in Q3 2012."

    But if you consider that each C1000 is actually five C200's (and likewise the C600 and C800 are multiples of the C200), then the fact is that there were considerably more than 109 microturbines ordered. I don't have the exact mix but if you look at the quarterly revenue table on page 21 of the 10Q, the total number of units for 3Q2013 is 162, compared to 166 for 3Q2012. You might conclude, incorrectly, that that reads as fewer microturbines. But if you account for how many individual turbines are actually in each unit, you come up with 231 for 3Q2013 vs 228 for 3Q2012. If you remove the smaller (and far less profitable) C30, C65, and TA100 and count only the C200 in all its packages the true picture begins to emerge, where we see just 96 units last year compared to 106 units this year. Not only that, but a greater percentage of those C200s were packaged into the larger units which sell at premium pricing and thus improve gross margin that much more.

    How exactly is that a bad thing again? Oh, yeah, you conclude it’s bad because “sales volumes aren’t growing.”

    But as I have just shown, you are WRONG on that point. Just because the number of “order” is smaller doesn’t mean the volume is not growing, if each order has more units embedded in it. There is still a greater volume of machines rolling off the production line. Any conclusion to the contrary is ignorant at best and spurious at worst.

    I’m not a big comic book fan but that line, “With great power comes great responsibility” is tough to avoid. The Motley Fool carries a mighty big stick in the retail financial media these days. Particularly with small cap stocks, this is the only outlet that issues any form of analysis or commentary after quarterly earnings reports, as is the case so far this time with Capstone. You owe it to your readers, and perhaps just as importantly you owe it to your own reputation, to take extraordinary measures to correct this error and set the record straight. Just changing a line or two in the article and a sneaky, weasel worded statement about it at the bottom is not good enough. You need to issue a NEW article with a NEW dateline, and you need to address WHY you are doing this at the TOP of the article so as to maximize the number of potential investors who read it and understand what happened. Even then you’re not likely to undo all the damage you did in the first hours of trading after this conference call but at least then you will have done the right thing.

    Come on Nema and Motley Fool. Don’t be like Jim Cramer after the fall of 2008. Don’t be blatantly WRONG and refuse to step up and be accountable for it.

  • Report this Comment On February 13, 2014, at 1:21 PM, Redwood wrote:

    One other point I should make just to emphasize the importance of why The Motley Fool should be aggressive in correcting the error committed here is that the incorrect data and incorrect conclusion that Nema has now at least partially fixed lives on over at Seeking Alpha, where so far they have done nothing to address the mistake they made when they quoted her original piece.

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