Who Says Capstone Turbine Corporation's Products Have Limited Applications?

Capstone Turbine (NASDAQ: CPST  ) investors were caught on the wrong foot as March drew to a close. There was no negative news from the company or the industry, but the stock tumbled 13% in just the last week of the month. And the stock hasn't quite recovered since.

A scathing article over at SeekingAlpha was largely to blame for the drop in Capstone shares. Contributor Adam Gefvert highlighted several yellow flags about the company and considered the stock hugely overvalued, sending investors for cover.

While I found the author's analysis lopsided in several ways, I'm going to pick on one point he mentioned that didn't seem to make much sense.

Comparison gone wrong?
While trying to draw a parallel between the recent run-up in prices of Capstone and fuel-cell stocks, Gefvert contended, among other points, that while newer markets are emerging for fuel cells, microturbines have applications in limited markets.

I beg to differ. Capstone already serves several market verticals, and the potential for newer opportunities within each is immense. See for yourself.

Oil and gas
The oil, gas, and natural resources sector ranks as Capstone's most important market right now, accounting for nearly 60% of its total shipments.

Some of the market segments to which Capstone caters. Source: Capstone Turbine

Here are some interesting facts that every Capstone investor should know:

  • Capstone turbines have already made inroads into the major U.S. shale regions, including the Eagle Ford, Marcellus, Utica, and the Permian Basin.
  • Capstone's customers include numerous major oil and gas customers, and it's already received several repeat orders from them over past few months, indicating the growing acceptance and popularity of its turbines.
  • Capstone microturbines can even run on flare (wasted) gas -- an advantage that helped the company bag a substantially big 24-megawatt order from Russia earlier this year. Did you know that Russia is the world's largest emitter of flare gas? 

In February, Capstone expanded its portfolio to the coal bed methane market by installing the first-ever methane-fueled microturbine in the U.S. at an energy plant belonging to CONSOL Energy (NYSE: CNX  ) . CONSOL expects the low-emission microturbine to eliminate 6,486 tons of carbon dioxide annually, resulting in energy cost savings worth $80,000 annually. That should also answer, in part at least, Gefvert's doubts about how green Capstone microturbines really are.

Hybrid electric vehicles
Capstone microturbines can work well as "onboard battery chargers" in hybrid electric vehicles. Last year, Capstone received an order for 34 C30 turbines for use in DesignLine electric buses in Denver, and topped it off with a new five-year agreement with the bus maker.

The hybrid electric vehicle market is still in a nascent stage, but Capstone is attracting serious attention. Truck maker PACCAR is developing heavy-duty (Class 7 and 8) hybrid trucks fitted with a Capstone microturbine.

Wal-Mart WAVE Concept Truck. Source: Wal-Mart

The latest, and perhaps the most intriguing, example is that of the WAVE concept truck that Wal-Mart showcased at the Mid-America Trucking Show in Louisville last month. Capstone engineered the hybrid powertrain system for the truck.

These trucks may be futuristic concepts, but they also reflect how far microturbines can go.

Real estate
I'll just give a few order examples here:

  • Capstone received orders for several C65 and C200 turbines from New York City-based privately held real estate firm, Related Companies, in May last year. Here's a tidbit: The turbines will be installed at various new projects, including commercial towers at Hudson Yards.
  • Last month, two Southern California-based hospitals ordered microturbines from Capstone. Consider that California is known worldwide for its stringent emission standards.
  • A resort in Hawaii ordered a C1000 earlier this year.

Simply put, Capstone microturbines can be used as a source of power at most kinds of establishments, which could open up doors to more markets in the future.

Marine
Capstone microturbines are already used by European-based Deen Shipping on its vessels. Last year, Capstone added six distributors to expand its marine portfolio in the U.S., targeting players along the Eastern U.S. seaboard, Gulf Coast, and the West Coast.

Given that more than 2.5 billion tons of freight is handled in U.S. ports every year, the marine industry could hold great potential for Capstone.

Landfill
Microturbines are a good fit at landfill sites because of their ability to convert waste gas into on-site electricity. Capstone turbines have been in use at the Sauk County Landfill in Wisconsin for several years now.

With the largest British landfill operator, FCC Environment, opting for a microturbine (built by Turbec) earlier this year, Capstone might also look forward to more orders in this market. Microturbines can also be used in wastewater treatment plants, as highlighted in a fact sheet released (link opens a PDF) by the U.S. Environmental Protection Agency last year.

Food industry
In mid-January, Capstone received orders from a couple Italian food manufacturing companies that found the low-maintenance microturbines' dual capacity to produce electricity as well as steam promising. Capstone had earlier sold several products to a Mexico-based food manufacturer.

Foolish takeaway
Remember, the above list isn't exhaustive, and Capstone Turbine's microturbines could find their way into more industries as global emission regulations tighten. Gefvert perhaps didn't do his homework well, but you certainly should when it's your hard-earned money that's at stake.

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Read/Post Comments (13) | Recommend This Article (18)

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 April 08, 2014, at 12:36 AM, DoubleFelix wrote:

    It seems like a lot of things are working, but they don't seem to be able to turn these demand opportunities into a profitable scale. This seems to be their moment. I just wonder if they have grown up with a bureaucratic culture, having been so closely aligned with the Dept of Energy for so many years. Do they really have the passion and savvy to make a breakout? I guess we will see in the next 6 months because all these demand generators seem to be heating up at the same time.

  • Report this Comment On April 08, 2014, at 7:36 AM, FoolishNature wrote:

    I also read Gefvert's "hit job" on Seeking Alpha and noted his numerous factual lapses, as well. At the end of his piece, he admitted he was short CPST, so in essence he was admitting to the fact this was a hit job and he was after a quick buck. Its a shame Gefvert and his ilk are allowed a podium for this sort of effluent, but as TMF always warns, readers should do their homework.

  • Report this Comment On April 08, 2014, at 7:44 AM, huntmasterx wrote:

    Imagine something that can be built into a package as small as a refrigerator that can take just about any combustible gas or vapor and produce electricity in commercially available quantities less than or near the cost of buying it at a power plant. It runs very cleanly, and produces much less pollution than even the cleanest diesel engines. You can drop it anywhere you want which is especially useful if a power line is 20 or thirty miles away.

    Now add the simultaneous ability to provide a large amount of usable heat. Make these things modular so you can strap them together to produce industrial quantities of heat and electricity. Make them so reliable so they can run 24 hours a day and they only have to be rebuilt every 4 or 5 years. Oh and they are relatively cheap compared to other equipment used for the same thing.

    Limited applications, really?

  • Report this Comment On April 08, 2014, at 11:12 AM, thetruthhelps wrote:

    "CPST CEO Jamison recently interviewed by FOX Business Network.. Fox Business reporter Stuart Varney is all excited about the Walmart WAVE truck powered by CPST micro turbines. But, Jamison also tells Varney that CPST has micro turbine engines running right now with FEDEX and Varney doesn't even respond. No CPST PRs and no news articles have been written about FEDEX using CPST powered drivetrains in their delivery trucks! Perhaps the biggest event in CPST recent history goes unreported???" I thought that this was an interesting comment on Yahoo.

    I note that you haven't mentioned the FEDEX sales either? How is it that you follow CPST but miss the fact that CPST is powering FEDEX delivery trucks in a Wrightspeed drivetrain package and that follow-up orders may be on tyne near horizon?

  • Report this Comment On April 08, 2014, at 11:30 AM, babyproofer wrote:

    If you read Gefverts profile, it states (copied form his profile page)

    A CFA Charterholder, Adam is an independent investment consultant and stock trader, with a lean towards technology and biotech stocks. He looks for misunderstood companies and special situations.

    Adam will only publish his research on Seeking Alpha that he believes will have an immediate impact on the stock. The information has to be valuable, unknown, and won't be interrupted by a trend enough to cause a reaction or Adam will either not publish it, or will give his readers a warning. He values his reputation for delivering action-worthy information.

    That said, Adam's theses are good for the long term holder as well because the information is powerful and isn't well known.

    Add that to being "short" CPST as also stated in the grayed out area of the article!

    At the time I read that, CPST revenue was -.6 per share compared to plug's -.83. Whose is bloated?

    Nuff said!!

  • Report this Comment On April 08, 2014, at 11:33 AM, babyproofer wrote:

    CORRECTION: Previous post: Misstatement: CPST was -.06 per share (not-.6) compared to -.83 for PLUG

    Sorry for the mistake

  • Report this Comment On April 08, 2014, at 1:15 PM, huntmasterx wrote:

    The really difficult part to manufacture on these turbines is the fan or the blades. 3D printing will solve that. In fact GE is already using 3D printing for some of their jet engine parts. These turbines will be mass produced almost like the refrigerators they are compared to.

    There is basically one moving part. Ask anybody who repairs things for a living what that is going to mean.

  • Report this Comment On April 08, 2014, at 3:38 PM, colin54 wrote:

    Form a medium term investment perspective I am happy to hold. - Surely with all the LNG it wouldn't be too difficult to fit one to a locomotive engine. = ultra low emission, electric drive and massively reduces $/tonne mile - Get on with it.

  • Report this Comment On April 09, 2014, at 8:39 AM, huntmasterx wrote:

    Capstone isn't manufacturing anything large enough to be power a modern over the road locomotive. They could be used for mass transit power such as light rail, busses or trucks. 1 MW is the upper end of their scale.

    A condo development or apartment building that provided electricity and heat from a shared installation would be a possible use. The association could also sell power back to the grid during the day when people are at work, power is at a premium and the residents don't need it.

    Another use would be for homes located in areas where running a power line might be expensive. Whole areas of the country could be opened for light development with clustered housing.

  • Report this Comment On April 09, 2014, at 9:19 AM, FoolishNature wrote:

    Tagging into Huntmasterx's comment above, I recall during Hurricane Sandy, a news report of a hospital I think in New York that survived with all their power in tact while everything around them failed. They had a Capstone installation.

  • Report this Comment On April 10, 2014, at 1:53 PM, tondog9070 wrote:

    While your above points, as to where MT's can be used are valid. Recip engines (SI methane) can and are used in all those applications as well; recip engines are also more efficient (fuel in vs. output) than Capstone Microturbines (very easy to Google this btw).

    Walmart has been "experimenting" with Capstone MT's at their Aurora, CO supercenter (which is Walmart's alternative energy test bed store) since on or around 2005 which has resulted in exactly zero follow on orders.

    Sans heavy government subsidy; for most applications (not all but most) it simply does not pay to buy a generator that is not the most efficient on the market. Due to physics an MT can never be as efficient as a similar output recip.

    Physics tends to get in the way of a lot of these "story" stocks.

  • Report this Comment On April 11, 2014, at 10:36 AM, huntmasterx wrote:

    I concur with tondog regarding recip engines versus the turbine but there are a couple of issues not considered. How often do those recip engines need the oil changed? Anything diesel is expensive. Ask an RV'er. The Micro Turbine- no oil changes. Change the air filter every 4k-8k hours. How often do they need to be rebuilt. How many moving parts? Recip engines what every 10 to 12k hours optimal. Micro Turbine 40k in continuous use. That's almost 5 years.

    Once 3D printing is used to build the fan in the turbine, what will the initial cost differential be? I would suggest that micro turbines with one primary moving part will become much cheaper when production ramps up. What are the other servicing intervals. Noise, emissions, and vibration. Amount of usable heat produced through cogeneration. The turbine wins hands down. Another important consideration. Modularity. These things are going to be almost like changing light bulbs.

  • Report this Comment On April 11, 2014, at 1:20 PM, MKantzler wrote:

    I wonder, with sanctions being imposed upon Russia, will that not mean Capstone will be unable to expand the inroads it made with initial sales to Russian enterprises, operating in or outside of Russia, before the annexation of Crimea? Are or will Russian energy-production needs be blocked to Capstone and other Western firms?

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