Capstone Turbine (Nasdaq: CPST), a world leader in the production of low-emission microturbine systems, is back in the news. The company recently received additional orders for its C1000 series products for the U.S and Russian markets. Is this big news for investors? Let's find out.
Here's the deal
The C1000 series products, which have additional features of remote monitoring and diagnostic capabilities, are gaining popularity among clean-technology customers. While the technology is catching on and the products generally receive strong reviews, additional orders from customers don't necessarily turn a company's fortunes around on their own. We need to dig a bit deeper to analyze the company's financial health.
The fundamentals
Capstone has reported an increase in its revenue over the past few years, which is undoubtedly a good thing for an energy upstart like this one. However, the increase hasn't been all that remarkable and has been overshadowed by higher costs of production.
Fluctuating costs of commodities such as steel and copper have adversely affected profits. Although raw material costs have been reined in to some extent over the past few years, volatile commodity prices still pose a threat to the company's long-term profitability and perhaps always will.
For the time being, investors should be concerned with the company's efficiency as a business. Return on equity, though improved year on year, still stands at -29.6% in 2010. This is a concern for the shareholders as Capstone is unable to dig out profits from its investments.
Key metrics such as return on assets and return on capital tell pretty much the same story. Even the cash from operations have declined further to -$51 million in 2010 from -$35 million in 2009. These figures highlight the company's inability to generate consistent cash flow.
It misses out
Capstone lacks the advantage of lower upfront costs, worldwide presence, and greater resources, which are essential for new product development. This is especially true in the energy space that's dominated by companies such as General Electric (NYSE: GE). Even though its research and development has helped in production of compact, light-weight, and environmentally friendly products, it is facing stiff competition from the manufacturers of reciprocating engines such as Caterpillar (NYSE: CAT) and Cummins (NYSE: CMI) -- two companies that are far better resourced to distribute competing products.
Need of the hour
Shares of Capstone Turbine have been outperforming the market since the start of this year. Soaring demand for clean technologies have clearly helped the company's stock, and I'm sure sky-rocketing oil prices haven't hurt either. However, Capstone needs to convert these demands into revenues to boost its operations and enhance competitive skills. The outperformance of this clean technology stock may be short-lived if the company continues to fall short of its ability to meet these demands. Investors should absolutely enjoy short-term gains from this stock, while also keeping in mind the fundamentals of the company.
