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Saturday, June 27, 2015 9:57:46 AM
Capstone Turbine: Weighing The Positives Against The Negatives, In 3 Charts
Jun. 26, 2015 9:12 AM ET
Value Ideas
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Summary
-CPST gets 60% of its revenue from the oil and gas market, which has taken a heavy toll on its performance along with other geopolitical and economic factors.
-CPST, however, has been able to improve its gross margin despite weakness in the top line, which is a positive sign for investors.
-CPST could see an improvement in its backlog as incomplete wells in the U.S. are completed and OPEC increases production.
CPST's FPP backlog is at record levels, and it should continue growing as the company has a large installed base of microturbines.
Capstone Turbine (NASDAQ:CPST) shares have taken a huge beating in the past year as the weakness in oil pricing, along with other geopolitical and economic factors, has weighed heavily on the company's performance. In fact, out of the last four quarters, Capstone has missed earnings estimates on three occasions, and that too by huge margins.
A string of problems
The situation was the same in the fourth quarter as well, which was reported last week. Capstone's revenue fell almost 18% year-over-year, while its loss increased to $0.05 per share. Various factors ranging from lower oil prices to geopolitical tensions in Russia, North Africa, and the Middle East weighed on its performance.
Moreover, lower crude oil prices forced oil companies to reduce their rig count and drilling activity, which negatively affected Capstone as it gets 60% of its revenue from the oil and gas industry. Additionally, the U.S. and European sanctions on Russia in response to the invasion of Ukraine devalued the ruble and severely damaged the Russian economy.
On top of all these headwinds, the improving fundamentals of the U.S. economy strengthened the U.S. dollar as compared to other currencies, making Capstone's products expensive in the overseas market. This had a major impact on its financials considering the fact that Capstone ships nearly half of its products to the international market. As such, it is not surprising to see that Capstone's backlog at the end of the quarter came down to $165.7 million, a decline of 3%, on an year-over-year basis.
Thus, from the above points, it is evident that Capstone is struggling due to a number of reasons. But, despite this, there are certain positives that investors should not ignore.
A look at the positives
Despite facing a string of problems in its end markets, Capstone Turbine has been able to keep its margin performance intact. This is shown in the following chart:
Thus, the problem that the company is facing is revenue-related, and an acceleration in its top line performance could lead to better times ahead. Now, there are certain tailwinds that Capstone could see going forward. For example, the company recently received 1.4 MW worth of microturbine orders from E-Finity Distributed Generation. These turbines will be used in the Utica and the Marcellus shale areas for oil and gas operations.
This might look surprising at first, since shale companies have been reducing their capital budgets and lowering rig counts. But, at the same time, there are a large number of incomplete wells in the U.S. shale areas that could generate returns for oil companies despite a challenging pricing environment. As reported by Fuel Fix:
"There are nearly 1,400 wells in the Eagle Ford Shale that have been drilled but not completed, according to new analysis from the firm IHS. Nearly 40 percent of those 1,400 delayed wells have a break-even costs below $30 per barrel, according to IHS."
Now, oil prices have recovered somewhat this year, with the WTI index now trading at $59.70 per barrel. This indicates that production from these incomplete wells could be profitable in the current pricing environment. As a result, oil companies might be encouraged to complete these wells and increase investments, which will help Capstone get more turbine orders.
On the other hand, OPEC is still maintaining its production at strong levels, producing more than 30 million barrels per day. Looking ahead, there is a probability that OPEC could increase production further as it sees the requirement for its crude oil to outpace production, as shown below:
Source: OPEC monthly report
This will increase Capstone's potential pipeline going forward. In fact, the company itself states that it has a potential pipeline of $1.5 billion in regions such as the Middle East, Latin America, and Africa, where it is starting to explore more opportunities.
FPP backlog is growing
Capstone Turbine already has a strong installed base of microturbines. As a result, the company will see an increase in revenue from the service and maintenance that it provides to its installed base, leading to an increase in the factory protection plan (NYSEMKT:FPP) backlog. In fact, the company has shipped over 85,000 units so far, and this will lead to growth in the aftermarket service business. Thus, it is not surprising that CEO Darren Jamison expects "the portion of aftermarket services to increase as a percentage of our total revenue."
Last quarter itself, Capstone's FPP backlog was a record $61.2 million, and as the company signs more FPP contracts for the long run and ships more units, this should increase. The following chart shows that
Source: Company presentation
Conclusion
Thus, despite headwinds, it cannot be ignored that Capstone Turbine is making positive moves in a number of areas. The company has held on to its gross margin and is seeing growth in the service backlog. As a result, investors can consider taking a closer look at the stock, especially because it has dropped close to 70% in the past year and trades close to its 52-week low, providing an entry point.
http://seekingalpha.com/article/3285945-capstone-turbine-weighing-the-positives-against-the-negatives-in-3-charts?auth_param=lir6:1aot8bg:c393e482ead116b8e89830ddc0068661&uprof=44
Jun. 26, 2015 9:12 AM ET
Value Ideas
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Summary
-CPST gets 60% of its revenue from the oil and gas market, which has taken a heavy toll on its performance along with other geopolitical and economic factors.
-CPST, however, has been able to improve its gross margin despite weakness in the top line, which is a positive sign for investors.
-CPST could see an improvement in its backlog as incomplete wells in the U.S. are completed and OPEC increases production.
CPST's FPP backlog is at record levels, and it should continue growing as the company has a large installed base of microturbines.
Capstone Turbine (NASDAQ:CPST) shares have taken a huge beating in the past year as the weakness in oil pricing, along with other geopolitical and economic factors, has weighed heavily on the company's performance. In fact, out of the last four quarters, Capstone has missed earnings estimates on three occasions, and that too by huge margins.
A string of problems
The situation was the same in the fourth quarter as well, which was reported last week. Capstone's revenue fell almost 18% year-over-year, while its loss increased to $0.05 per share. Various factors ranging from lower oil prices to geopolitical tensions in Russia, North Africa, and the Middle East weighed on its performance.
Moreover, lower crude oil prices forced oil companies to reduce their rig count and drilling activity, which negatively affected Capstone as it gets 60% of its revenue from the oil and gas industry. Additionally, the U.S. and European sanctions on Russia in response to the invasion of Ukraine devalued the ruble and severely damaged the Russian economy.
On top of all these headwinds, the improving fundamentals of the U.S. economy strengthened the U.S. dollar as compared to other currencies, making Capstone's products expensive in the overseas market. This had a major impact on its financials considering the fact that Capstone ships nearly half of its products to the international market. As such, it is not surprising to see that Capstone's backlog at the end of the quarter came down to $165.7 million, a decline of 3%, on an year-over-year basis.
Thus, from the above points, it is evident that Capstone is struggling due to a number of reasons. But, despite this, there are certain positives that investors should not ignore.
A look at the positives
Despite facing a string of problems in its end markets, Capstone Turbine has been able to keep its margin performance intact. This is shown in the following chart:
Thus, the problem that the company is facing is revenue-related, and an acceleration in its top line performance could lead to better times ahead. Now, there are certain tailwinds that Capstone could see going forward. For example, the company recently received 1.4 MW worth of microturbine orders from E-Finity Distributed Generation. These turbines will be used in the Utica and the Marcellus shale areas for oil and gas operations.
This might look surprising at first, since shale companies have been reducing their capital budgets and lowering rig counts. But, at the same time, there are a large number of incomplete wells in the U.S. shale areas that could generate returns for oil companies despite a challenging pricing environment. As reported by Fuel Fix:
"There are nearly 1,400 wells in the Eagle Ford Shale that have been drilled but not completed, according to new analysis from the firm IHS. Nearly 40 percent of those 1,400 delayed wells have a break-even costs below $30 per barrel, according to IHS."
Now, oil prices have recovered somewhat this year, with the WTI index now trading at $59.70 per barrel. This indicates that production from these incomplete wells could be profitable in the current pricing environment. As a result, oil companies might be encouraged to complete these wells and increase investments, which will help Capstone get more turbine orders.
On the other hand, OPEC is still maintaining its production at strong levels, producing more than 30 million barrels per day. Looking ahead, there is a probability that OPEC could increase production further as it sees the requirement for its crude oil to outpace production, as shown below:
Source: OPEC monthly report
This will increase Capstone's potential pipeline going forward. In fact, the company itself states that it has a potential pipeline of $1.5 billion in regions such as the Middle East, Latin America, and Africa, where it is starting to explore more opportunities.
FPP backlog is growing
Capstone Turbine already has a strong installed base of microturbines. As a result, the company will see an increase in revenue from the service and maintenance that it provides to its installed base, leading to an increase in the factory protection plan (NYSEMKT:FPP) backlog. In fact, the company has shipped over 85,000 units so far, and this will lead to growth in the aftermarket service business. Thus, it is not surprising that CEO Darren Jamison expects "the portion of aftermarket services to increase as a percentage of our total revenue."
Last quarter itself, Capstone's FPP backlog was a record $61.2 million, and as the company signs more FPP contracts for the long run and ships more units, this should increase. The following chart shows that
Source: Company presentation
Conclusion
Thus, despite headwinds, it cannot be ignored that Capstone Turbine is making positive moves in a number of areas. The company has held on to its gross margin and is seeing growth in the service backlog. As a result, investors can consider taking a closer look at the stock, especially because it has dropped close to 70% in the past year and trades close to its 52-week low, providing an entry point.
http://seekingalpha.com/article/3285945-capstone-turbine-weighing-the-positives-against-the-negatives-in-3-charts?auth_param=lir6:1aot8bg:c393e482ead116b8e89830ddc0068661&uprof=44
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