The Long-Term Bull Case for Capstone Turbine

The very first admission is that when it comes to true clean or green energy, Capstone’s microturbine technology solutions for use in stationary distributed power generation applications should be considered “less dirty energy” rather than true clean tech. Still, this company has been represented in clean energy indexes.

Capstone’s power systems are used by remote oil and gas project operators onshore and offshore, as well as other industries needing remote power. Its earnings are still very sporadic, and the recent reported loss created a sell-off before the shares recovered. Capstone Turbine has yet to make a meaningful move into profitability.

One boost for the company, which has acted to dilute shareholders in the process, is that the capital markets keep giving Capstone new capital. The company just raised almost $30 million more, and it trades with a very high price-to-book ratio. The company claims a record backlog of more than $171 million, and it claims that gross margin (despite losses) was at a high of 16% this year. Still, its accumulated losses on the books of $770 million have slowed in growth, and next calendar year is supposed to be the company’s step into profitability.

Not everyone was full of recent optimism here. Zacks Investment Research issued a Strong Sell rating after the company lost a penny per share and revenues fell 2% sequentially to $36.4 million last quarter. What we are looking at as the opportunity is that those revenues of $127.5 million in 2013 had basically doubled since the previous year. Capstone’s revenues are expected to rise to more than $200 million over the next two years.

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Our upside and base case view is that the revenue picture has exponential growth ahead of it. Base case is 50% to 100% revenue growth in the next four or five years. The upside case would be longer still, but that would be if the company believes revenues can eclipse $500 million this decade and approach $1 billion in the next decade.

The reality check is that Capstone has continued to live up only to our base case expectations. Also, the continued capital raises have kept diluting and diluting the shareholders. There is huge upside, but the company has to start beating the base case or giving under-base case estimates to entice more investors.

This company has almost zero real analyst coverage from traditional Wall Street firms. Still, one analyst has a formal $2.50 price target, versus a $1.53 share price and $1.07 to $2.60 trading range of the past year.

Again, Capstone Turbine would be considered the least pure among companies counted as green tech or clean tech. Still, significant upside can be realized here under a base case or upside scenario. Capstone Turbine is based in Chatsworth, Calif., and has sales and service centers in China, Mexico, Singapore, South America and the United Kingdom.

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