Friday, October 10, 2014 1:33:24 PM
Capstone Turbine: Will Announce First Quarterly Profit Ever?
Oct. 6, 2014 7:45 AM ET
http://seekingalpha.com/article/2541515-capstone-turbine-will-announce-first-quarterly-profit-ever
Disclosure: The author is long CPST.
Summary
•Growing Backlog and Margin Improvement.
•Strong Order Flow Including Russia.
•Energy Sector Bottoming Setting Up A Bounce Opportunity.
Capstone Turbine (NASDAQ:CPST) continues to remain a strong candidate for above average returns for investors. It closed Friday, October 3, 2014 at $1.03, but made a higher low following a 52 week low the previous day. The chart set up is very similar to the set up I noted for my last Capstone article. Capstone has had steady order flow, but there seems to be a current sentiment that investors need to see orders shipped, not just flow to make further investments in the company. The growing backlog seems to be part of the misunderstanding. The correlation some are making is that since backlog is increasing that orders are not shipping. This is simply incorrect and the wrong argument to make against this stock. A simple look at the companies Annual Report, latest 10-K, or 10-Q will show this is very short sighted. For FY14 Capstone shipped 110 megawatts or 671 units compared to 628 units or 103 megawatts for the year prior. Here is the cumulative chart from the annual report:
In my opinion, it is easier to look at megawatts over units because of the variability in unit costs for the different models. One megawatt equates to roughly 1 million dollars in revenue generation. The stock has also been attacked by known shorts, especially during the announcement of Russian sanctions. The company has said repeatedly that current sanctions do not materially affect its business with Russia at this time. In fact, the Sochi Olympic complex was recently announced as part of a 5.5 megawatt deal. The backlog is a substantial benefit for investors, currently standing at 188 megawatts, 820 units, or $175 million dollars in deferred revenue. There is additional backlog of 55 million dollars for its service contracts that can last for nine years. Service revenue accounts for approximately 7% of total revenue generation and is an important component of the operation. I can not over emphasize to investors the impact that this $230 million dollar backlog can have for a company with a market cap of $339.5 million dollars. Backlog is a primary indicator of revenue growth and a store of value for investors that will be unleashed on a profit announcement.
Previously, I noted that based on the last 10-Q, the order flow to that point was worth somewhere between 7.4 - 9.5 million dollars. Since that time there have been significant orders totaling a minimum of 18 megawatts. Conservatively, this represents $25 - $30 million dollars in revenue this quarter so far, not including the 9 megawatt service contract. Service revenue should provide an additional $2.5 million in revenue based on the 7% contribution rate. Capstone has running liabilities of roughly 9 million dollars per quarter, if the company achieves a 20% margin it requires roughly $45 million in revenue to achieve a profit. That leaves a 10-15 million dollar gap to profitability. There will be a nice earnings surprise this quarter if the company executes unannounced orders, delivers backlog, or achieves it's 35% margin goal.
The energy sector is a laggard when compared to the Standard and Poor's 500 for the year, but has really diverged on a three month basis. With current government policy I expect the higher demand for alternative energy sources will continue as oil prices recover. While oil is down for the year, natural gas is up nearly 20%. Natural gas usage is expected to rise as good supply, tighter emission standards, and efficiency requirements make it the alternative of choice for industrial use. However, over the last three months both have declined nearly 10%. It looks as though we may be bottoming, both the natural gas ETF (NYSEARCA:UNG) and oil ETF (NYSEARCA:USO) are at lower trendline support, and a bounce in the broader energy market could also lift shares of Capstone. Here is the CPST chart from FinViz.com:
CPST is oversold at these levels as well and may be worth a look, especially with energy market improvement. The stock has both a falling wedge and descending channel pattern, with the falling wedge the longer term dominant, beginning in March of this year. RSI is bottoming, MACD is flat, and the Stochastics are very oversold. Previous trips to this stochastic level on the chart have resulted in nice bounce trade opportunities. Thursday, October 2, 2014, the stock hit $1.00, a new 52 week low but put in a higher low on the following day indicating rejection. The stock was met with resistance at $1.05 on both days. Capstone has decent institutional ownership at 43.5% while 15% of the float is short. I believe shorts will begin to cover into earnings which will take 28 days at the current average volume. The average target price by analysts is $1.89. I maintain a long-term core position for this stock as an investment, but I plan to trade this level with a .99 cent stop loss. I will look to scale at 20, 50, and 200dma targets with the expectation the 50 day moving average won't be breached without a significant order announcement or a profitable quarter, which would be a catalyst for a major breakout.
________________________________________________________________
Active Fin:
10/10/14 .9231
Oct. 6, 2014 7:45 AM ET
http://seekingalpha.com/article/2541515-capstone-turbine-will-announce-first-quarterly-profit-ever
Disclosure: The author is long CPST.
Summary
•Growing Backlog and Margin Improvement.
•Strong Order Flow Including Russia.
•Energy Sector Bottoming Setting Up A Bounce Opportunity.
Capstone Turbine (NASDAQ:CPST) continues to remain a strong candidate for above average returns for investors. It closed Friday, October 3, 2014 at $1.03, but made a higher low following a 52 week low the previous day. The chart set up is very similar to the set up I noted for my last Capstone article. Capstone has had steady order flow, but there seems to be a current sentiment that investors need to see orders shipped, not just flow to make further investments in the company. The growing backlog seems to be part of the misunderstanding. The correlation some are making is that since backlog is increasing that orders are not shipping. This is simply incorrect and the wrong argument to make against this stock. A simple look at the companies Annual Report, latest 10-K, or 10-Q will show this is very short sighted. For FY14 Capstone shipped 110 megawatts or 671 units compared to 628 units or 103 megawatts for the year prior. Here is the cumulative chart from the annual report:
In my opinion, it is easier to look at megawatts over units because of the variability in unit costs for the different models. One megawatt equates to roughly 1 million dollars in revenue generation. The stock has also been attacked by known shorts, especially during the announcement of Russian sanctions. The company has said repeatedly that current sanctions do not materially affect its business with Russia at this time. In fact, the Sochi Olympic complex was recently announced as part of a 5.5 megawatt deal. The backlog is a substantial benefit for investors, currently standing at 188 megawatts, 820 units, or $175 million dollars in deferred revenue. There is additional backlog of 55 million dollars for its service contracts that can last for nine years. Service revenue accounts for approximately 7% of total revenue generation and is an important component of the operation. I can not over emphasize to investors the impact that this $230 million dollar backlog can have for a company with a market cap of $339.5 million dollars. Backlog is a primary indicator of revenue growth and a store of value for investors that will be unleashed on a profit announcement.
Previously, I noted that based on the last 10-Q, the order flow to that point was worth somewhere between 7.4 - 9.5 million dollars. Since that time there have been significant orders totaling a minimum of 18 megawatts. Conservatively, this represents $25 - $30 million dollars in revenue this quarter so far, not including the 9 megawatt service contract. Service revenue should provide an additional $2.5 million in revenue based on the 7% contribution rate. Capstone has running liabilities of roughly 9 million dollars per quarter, if the company achieves a 20% margin it requires roughly $45 million in revenue to achieve a profit. That leaves a 10-15 million dollar gap to profitability. There will be a nice earnings surprise this quarter if the company executes unannounced orders, delivers backlog, or achieves it's 35% margin goal.
The energy sector is a laggard when compared to the Standard and Poor's 500 for the year, but has really diverged on a three month basis. With current government policy I expect the higher demand for alternative energy sources will continue as oil prices recover. While oil is down for the year, natural gas is up nearly 20%. Natural gas usage is expected to rise as good supply, tighter emission standards, and efficiency requirements make it the alternative of choice for industrial use. However, over the last three months both have declined nearly 10%. It looks as though we may be bottoming, both the natural gas ETF (NYSEARCA:UNG) and oil ETF (NYSEARCA:USO) are at lower trendline support, and a bounce in the broader energy market could also lift shares of Capstone. Here is the CPST chart from FinViz.com:
CPST is oversold at these levels as well and may be worth a look, especially with energy market improvement. The stock has both a falling wedge and descending channel pattern, with the falling wedge the longer term dominant, beginning in March of this year. RSI is bottoming, MACD is flat, and the Stochastics are very oversold. Previous trips to this stochastic level on the chart have resulted in nice bounce trade opportunities. Thursday, October 2, 2014, the stock hit $1.00, a new 52 week low but put in a higher low on the following day indicating rejection. The stock was met with resistance at $1.05 on both days. Capstone has decent institutional ownership at 43.5% while 15% of the float is short. I believe shorts will begin to cover into earnings which will take 28 days at the current average volume. The average target price by analysts is $1.89. I maintain a long-term core position for this stock as an investment, but I plan to trade this level with a .99 cent stop loss. I will look to scale at 20, 50, and 200dma targets with the expectation the 50 day moving average won't be breached without a significant order announcement or a profitable quarter, which would be a catalyst for a major breakout.
________________________________________________________________
Active Fin:
10/10/14 .9231
"Then there was a woman, a lion of a woman."
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