Capstone Green Energy Corp (fka CGRNQ)

[CaptWhizbang]

Capstone Turbine: A Turnaround Play That Investors Shouldn't Miss

Oct. 21, 2014 2:58 AM ET

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)

Summary
•Recent developments at Capstone Turbine indicate that the company is in turnaround mode after a period of weakness.
•Capstone is seeing a spurt in order rates, indicating an upturn in the business.
•Capstone will also benefit from the increasing usage of microturbines across different solutions, while focus on technology development will help it gain more customers.
•Capstone's earnings are expected to grow at an impressive rate over the next five years, making it a turnaround play worth considering.

After a woeful time so far this year, it looks like Capstone Turbine's (NASDAQ:CPST) turnaround is finally here. The microturbine technology solutions company recently shot up 8% in a single day after securing a key order. A Capstone press release says that "it recently received a one megawatt order for a new residential high-rise building in Masan, South Korea."

Although the terms of the order were not disclosed, Capstone shares rose as the company has secured a number of orders in the past few months. This will come as a relief to investors, who have seen Capstone drop around 30% so far in 2014. Moreover, Capstone Turbine had disappointed the Street with its first-quarter results. Its revenue had dropped year over year, while the company also failed to reduce its losses, apart from missing analysts' estimates.

As a result, the stock had dropped close to its 52-week recently, but now it looks like Capstone is ready to make a comeback. But then, investors should be aware of a few things before investing in Capstone.

Looking beyond the pain

Capstone has suffered from a delay in shipments and the installation of equipment on project sites that have resulted in an excess finished goods inventory. Fluctuation in shipment timing is one of the major factors affecting this company. Explaining this, Capstone CEO Darren R Jamison said, "Our business is very sensitive to our customers' specific project timing. If a customer's not ready to take delivery of equipment on the project site, we cannot ship the product until it's ready for installation."

In addition, new order growth has also been slow of late on account of a price hike a few months back. However, Capstone sees its product pipeline becoming stronger than before because of the long-term secular trends driving the market for distributed generation. Therefore, in spite of these challenges and poor numbers last quarter, management hopes to get better going forward. As such, the recent spurt in orders indicates that Capstone is moving in the right direction.

New contracts indicate a turnaround

These new contracts reflect a turnaround, and also show that the company has strong long-term growth prospects. Capstone has expanded its reach in various geographical locations, and is especially optimistic about the Bakken shale play in North Dakota.

Capstone recently bagged its first order in Oman from PipeLine Supply Company, which is its new distributor for Oman and Qatar. Capstone's fit in, flare-gas-to-power projects are in good demand in oil producing regions such as Oman, and this new order could open other doors for the company in this region. Also, the company is expanding in other regions as well, with Indonesia and Finland being its latest additions.

Apart from the oil space, Capstone is receiving orders from other sectors as well. It recently received an order from United Technologies (NYSE:UTX) for 10 C65s for a hospital in Southern California. This order is important since United Technologies is placing an order after a gap of around three years, which is a positive development. Similar orders include a one megawatt C1000, which was ordered by a resort in the U.S. Virgin Islands, twenty five C65 microturbines for CHP (combined heat and power) and oil and gas applications in the Mid-Atlantic United States, and others.

Potential growth across different markets

In the marine market as well, Capstone has huge potential, especially after the International Maritime Organization limited sulfur oxide emission to 0.1% from its current level of 1.5%. The combustion of ordinary diesel and heavy fuel releases significant proportion of sulfur oxide, while LNG has virtually zero sulfur oxide emission. The entire system will become more efficient if hybrid electric powertrains are used, and this is where Capstone is focusing with its product development.

The company is negotiating with European certification agencies to support new grid interconnect standards. This will strengthen its position in other markets as well because future interconnect requirements are being discussed in the U.S., Canada, and other regions. In addition, Capstone is focused on improving efficiency. According to management:

“
"In research and development we have begun the second phase of our C250 program with the U.S. Department of Energy. We have successfully demonstrated the role of C250 in the lab while achieving the California Air Resources Board or CARB level emissions without any after treatment. I am proud to say that C250 will soon enter beta fuel testing later this year. Phase 2 of the program is expected to incorporate further engine efficiency improvement resulting in product with a projected electrical efficiency of 42% and a targeted power output of 370 kilowatts for the C370."

Conclusion

Thus, from a long-term perspective, Capstone looks like a strong bet. Although there might be headwinds in the short term due to project timings, the company's focus on research and development and the pick-up in the ordering rate indicate better times ahead. Moreover, analysts expect Capstone's earnings to grow at a CAGR of 25% over the next five years, which is another indication that the company can deliver growth in the long run. As such, Capstone looks like a turnaround play that investors need to watch.

http://seekingalpha.com/article/2577155-capstone-turbine-a-turnaround-play-that-investors-shouldnt-miss?page=2