Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: After a double-digit rally in January, shares of Capstone Turbine (CPST -9.62%) continued to soar last month, gaining another 20% even in a shorter month. But what's bidding the shares so high, and are they already overheating? After all, Capstone shares tumbled 10% as soon as March opened trade. So where's it headed?
So what: In terms of orders, February went dry without a single major order announcement from the company. In contrast, January was all about new orders. But all eyes were on Capstone's earnings as February set in. The company didn't disappoint -- its third-quarter revenue jumped 11%, gross margin hit 20%, losses halved to $2.2 million, and backlog value grew 18% year over year. But the market still dumped the shares after the results were announced, probably because it was hoping to finally see Capstone's bottom line turn black.
But investors' attention soon turned to Capstone's growing order book (its Q3 order value surged more than 80%, both sequentially and year over year), and the shares never looked back. By the third week of February, Capstone stock was touching its two-year high. A lot of it also had to do with the new stock upgrade, courtesy FBR Capital.
FBR expects Capstone shares to outperform peers over the next 12 months and hit a price of $2.50 a share. FBR is bullish about the prospects of the company's multi-fuel microturbines as alternative fuels like natural gas gain traction, and expects the company to turn profitable and cash-flow positive over the next couple of years.
That sounds feasible, considering that Capstone hopes to break even on operating earnings next quarter. Capstone estimates that it could turn cash-flow positive once its quarterly shipments touch 200 units. Capstone shipped a little more than 160 units each during the last two quarters. Of course, the product mix will play an important role here. The company appears to be selling a greater number of premium-priced larger units. For instance, on its C1000 series, Capstone booked revenue for 44% and 75% higher megawatts year over year in Q2 and Q3, respectively. So it may appear that Capstone may not have to wait for 200 units to start generating cash flows, but considering that the company stuck to that estimate even in an otherwise strong Q3, I'm not making too many guesses.
Now what: Repeat orders from customers indicate greater acceptance of Capstone's turbines, and the company is rapidly spreading its wings. Capstone's revenue and gross margin are growing at a steady pace, so profitability shouldn't be too far, provided macro factors don't play spoilsport.
The tension between Russia and Ukraine has made investors jittery, and rightly so. Capstone counts Russia as its "top international oil and gas market." Capstone's revenue from Europe jumped 34% during the nine months ended Dec. 31, 2013, thanks primarily to robust demand from Russia. In fact, Capstone mentioned the market to be the primary factor behind the 5% growth in its revenue during the period. Earlier this year, the company also bagged a 24-megawatt order from power stations in Russia.
Naturally, any adverse economic news out of a country that has the potential to turn into a major market for Capstone bodes ill for the company and its investors. No one knows how bad it could get, but there's a good chance Capstone may not escape unscathed, especially since gas prices and supply are the first to get hit in such situations. Orders from gas companies could slow down or payments could get delayed. If the situation worsens, the weakness could even spill over to other European markets. That would be terrible news for Capstone.
Capstone shares are anyway still largely a trader's play, and the Ukraine crisis means that shares could get really volatile from here. Stay cautious.