Capstone Green Energy Corp (fka CGRNQ)

[CaptWhizbang]

Capstone Turbine Technicals Are Starting To Match Improving Fundamentals: Part 1
July 13, 2012

Disclosure: I am long CPST. Please do your own due diligence and/or consult with a qualified investment advisor before investing. I may buy or sell any of the stocks mentioned in this article at anytime.


Despite strengthening fundamentals, irrationally Capstone Turbine, Inc (CPST) stock has been under downside pressure, likely due to the short interest of 52.4 million shares, equating to 20.5% of the float. CPST is the world's leading producer of low-emission micro turbine systems and was the first to market commercially viable microturbine energy products. CPST has shipped over 6,500 microturbine systems worldwide, is benefiting from market trends and receiving add-on orders from customers thereby attesting to the viability, reliability and value of their products.

According to a Paragon report on July 9, 2012, "The current abundance of shale gas, which has become readily available with the emergence of 'fracking,' has begun to stunt the growth of renewable energy. The present glut of natural gas has seen prices free fall from its high of $20 per million British thermal units in 2003, to the current lows of under $3. The low prices of natural gas will continue to pose a threat to the future growth of wind and solar energy until at least 2030 according to the International Renewable Energy Agency, a United Nation's agency…. 'In the next two decades, I would say probably there will be less of a gas-price increase than projected five years ago,' says Dolf Gielen, the director of Irena's Innovation and Technology Centre.' And the net effect, of course, of less increase in gas prices is less rapid growth of renewables." The intelligent investor sees that as a relative-play, CPST greatly benefits from this trend, as their systems run on a variety of fuels, including Natural Gas itself, which has contributed to its penetration of new markets. In fact, CPST's product shipments in 2012 were 58% oil and gas.

Typically, oil and gas or mining operations have no electric utility grid and rely solely on Capstone's microturbines to produce highly reliable critical power with low emissions on site. CPST is taking advantage of the shale boom by selling to those companies engaged in "fracking." As announced in a July 11, 2012 deal to install CPST's microturbine systems in Columbia, "When commissioned in August, the C800 will replace five antiquated Caterpillar diesel gensets and produce 800 kilowatts of clean electricity using natural gas directly from the pipeline. The reliable electricity will power auxiliary equipment -- coolers, motors, pumps, compressors, and lights -- that enable the compressor station to push 737 million cubic feet of natural gas per day through the pipeline--43 percent of the country's natural gas supply." The facility operators wanted a modular, reliable, and cost effective power system to replace the high maintenance diesel generators. The Capstone C800 Power Package will supply 100 percent of the facility's power even during fluctuating power loads each season. Compared to the former gensets at the compressor station manufactured by Caterpillar (CAT), the C800 will operate at 99.1 percent availability, resulting in an estimated annual 20 percent cost savings. 'In the last 10 years, Colombia's natural gas production has substantially expanded, and investments in this sector have risen to historical levels,' said Jim Crouse, Capstone's Executive Vice President of Sales and Marketing. As the country continues to improve and expand its gas transportation network, Capstone microturbines can be the reliable energy system that allows companies to sever their dependence on less efficient and undependable gensets and utility power."

Capstone's June 14, 2012 release of fiscal fourth quarter and full year financial reports stated 2012 was a "watershed year." The fourth quarter represents the company's 20th consecutive quarter of revenue growth with total revenues of $30.1 million, up by 30 percent year-over-year and fiscal 2012 represents the first year in which the company has achieved positive gross margins in every quarter. As stated by CPST CEO Darren Jamison, "We managed to increase our C200 engine build to 99 units, up from 88 in the third quarter. We again delivered positive gross margin, which we have done for 6 of the last 7 quarters. Both inventory turns and accounts receivable collections improved during the quarter and quarter-over-quarter results were $4.5 million in positive operating cash. Obviously, this leaves Capstone with a very strong balance sheet of $50 million at year end. We also made considerable progress during the fourth quarter in major market sector penetration." Furthermore, Jamison states "Based on the markets we serve, we estimate Capstone's potential market share to be as high as $1.5 billion of the $14.6 billion current market opportunity." Even a 50% haircut to Jamison's estimate and further assuming the stock trades at the industry average of 1.21 times sales, the stock would realize an approximate 3-fold price increase (current market cap of approximately $330 million). Based thereon, investors and traders in $1-2 stocks such as A123 Systems (AONE), GenOn Energy Inc (GEN), FuelCell Energy (FCEL) and JA Solar Holdings Co., LTD (JASO) should consider buying CPST as it is the only one of the aforementioned stocks with positive revenue growth and a positive forward P/E ratio. Without excluding the others as good speculative plays, CPST is well worth considering based upon its apparent, impending turn towards profitability. Fundamentally, the market has not priced in this progress towards the black. Although gross margins did not reach anticipated levels, they were nonetheless positive in all four quarters of FY2012 and margin growth is not a prerequisite to profitability, assuming CPST continues to realize compound revenue growth.

Finally, CPST technicals are extremely bullish. The stock bounced near its 50-day moving average of $1.01 and is breaking above its 200-day moving average of $1.09 with volume well above its three-month average of approximately 3 million shares. In the very near future, this stock appears ready to test and quite possibly break through its resistance levels in the $1.20-$1.25 range and furthermore, over the long-term, could easily triple in price.

Since the time of my previous article of July 13, 2012, there have been exciting developments for Capstone MicroTurbine (CPST), all serving to reinforce my previously expressed view that the stock could triple in value. In fact, on September 5, 2012, a $2 target was initiated at Craig-Hallum, which exhibits confidence that the stock will double in value.

On CPST's earnings call of August 9, 2012, CEO Darren Jamison commented, "We are able to increase revenue year-over-year despite the challenging economic conditions worldwide due to two key factors: First, we continue growth in broadening of our distribution network; and secondly, the continued market acceptance of our new C200, C1000 Series microturbine products. Product revenue for the quarter was $23.6 million, up 13% year-over-year. New product orders totaled $24.1 million for the quarter, which, again, gave us a positive book-to-bill ratio. We shipped 25.1 megawatts, which was up 15% from 21.9 megawatts in the first quarter last year."

Edward Reich, CFO, informed, "Average revenue per unit increased to approximately $176,000 compared to $167,000 for the fourth quarter of fiscal '12 and $122,000 for the same period one year ago. These increases are the result of both higher pricing and a shift in mix for larger capacity products. Gross margin for the first quarter was $2.2 million, or 8% of revenue compared to $900,000, or 3% of revenue for the fourth quarter of fiscal '12 and $500,000, or 2% of revenue for the same period 1 year ago. The shift in mix to large capacity products increased pricing and lower material costs continue to drive improved gross margin. Capstone has now posted positive gross margins for 7 of the last 8 quarters. Most importantly, we again delivered positive gross margins, which we have now done in 7 of the last 8 quarters. Gross margins increased to 8% or nearly 600 basis points year-over-year as we realize strong sales volumes from higher kilowatt products and a 44% higher average revenue per unit while continuing to focus on reducing direct material costs."

The stock reached a 52-week high of $1.53 on February 7, 2012, and crossed above its 50-day moving average of $1.03 in intraday trading on September 13, 2012. Since my aforementioned article, the short interest decreased from 51 million to 49 million or 16.5% of the float, with institutions holding 40% of that float. I believe there is limited downside and a short squeeze is possible if the stock breaks above its 200-day moving average of $1.04.

Moreover, with $45 million cash and only $13 million in debt, CPST has a strong balance sheet. Considering the stock price, the company's performance, and the short interest, I expect CPST to make a strong upside move. Therefore, investors and traders in lower-priced stocks such as A123 Systems (AONE), GenOn Energy Inc (GEN), FuelCell Energy (FCEL) and JA Solar Holdings Co., LTD (JASO) should consider buying CPST, the only one of the aforementioned stocks with positive revenue growth and a positive forward P/E ratio. Without excluding the others as good speculative plays, CPST, with its apparent, impending turn towards profitability is well worth consideration.

http://seekingalpha.com/article/867121-capstone-part-2-bounding-towards-triple-value?cache=0.21481861179266137