While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades – just in case the reasoning behind the call makes sense.
What: Shares of microturbine maker Capstone Turbine (CPST) were on a tear last week, gaining as much as 10% after FBR Capital upgraded its rating on the stock to outperform, planting a price target of $2.50 a share. That represents a solid 41% upside from the stock's Friday's close.
So what: Analyst Aditya Satghare believes that "natural gas as a fuel is at an inflection point and that Capstone, with its reliable and versatile microturbine product, is well positioned in this market." Capstone's microturbines can operate on a variety of fuel forms, including natural gas, diesel, flare gas, kerosene, propane, and even biogas.
So Satghare is clearly bullish on the potential of natural gas as an alternative fuel (which is also why he upgraded shares of Westport Innovations, the innovator in natural gas engine technology, last week), and sees promise in Capstone's versatile microturbines. Satghare expects "a sizable increase in order sizes, from both new and repeat customers, over the next 12-24 months" for Capstone, which should help the company "transition into a profitable and cash flow-positive business model" over the period. That certainly sounds optimistic for a company that sold its first microturbine in 1998, but has yet to turn a profit.
Now what: Given how a greater number of stringent emission standards are being rolled out across the globe, Capstone appears to be in the right business at the right time. Capstone's burgeoning order book and growing backlog evidences the rising demand for its turbines. Management also seems to be doing a neat job at controlling costs -- Capstone's last-quarter gross margin was at record high.
So if Capstone's revenue and margin continue to grow at good pace, chances of it turning profitable over the next year or two, as Satghare projects, can't be ruled out. But that's just an estimate, and as a prudent investor, I'd rather wait for the first signs of profitability and positive cash flows from the company before I get my hands on its stock.
