Creating exceptional products is a significant accomplishment, but in order for shareholders to be rewarded a company must be able to develop, manufacture and sell those products profitability. Capstone Turbine Corporation (NASDAQ:CPST) (“Capstone”) is the world leader in low-emission microturbine systems based on number of microturbines sold. Despite challenging economic conditions, Capstone was able to report record revenues and improving gross margins during the fiscal year ended March 31, 2011 although they have yet to achieve profitability.
Founded in 1988, Capstone develops, manufactures, sells and services microturbine technology solutions. Capstone is headquartered in the Los Angeles area with sales and/or service centers in New York, Mexico City, Nottingham, Shanghai and Singapore. Capstone’s microturbines are similar to a miniature jet engine and the turbogenerator has just one moving part supported by Capstone’s patented air bearings. The microturbines are ideal solutions for resource recovery where fuel is readily available and often an expense to dispose of, for secure power, as battery charging generators for hybrid electric vehicles, and in remote power applications where the costs of connecting to the grid may be high or impractical.
The microturbines also provide economic benefits relative to power purchased from the electric utility grid in instances where the waste heat from the microturbine has value as in combined heat and power (CHP) and combined cooling, heat, and power (CCHP) applications. Energy efficiencies for CCHP applications are near 90 percent.
Capstone’s microturbines operate on a variety of gaseous or liquid fuels including, but not limited to; unprocessed wellhead gas providing a reliable power source to onshore and offshore oil and gas operations and waste gas from landfill, wastewater, and agricultural operations. The microturbines are scalable from 30 kilowatts (kW) to five megawatts (MW) and are a clean, green, reliable source of electricity and thermal power.
Microturbines compete with other distributed generation technologies such as solar and fuel cells, along with reciprocating engines from companies that have products and markets that are well developed and technologies that have been proven for some time. In comparison to traditional reciprocating engines, Capstone’s microturbines have greater reliability, require less maintenance, and emit less greenhouse gas emissions.
According to Capstone's earnings call presentation and transcript the addressable markets for Capstone’s products are estimated to be in excess of $14.6 billion annually, with potential targeted capture for Capstone of $1.5 billion over the next 7 to 10 years. Nearly $1 billion of the potential capture comes from oil & gas, combined heat & power, and renewable energy markets. Low emissions and low maintenance are becoming more valued by the oil and gas industry as they search for oil and gas in more remote locations and emission regulations become more stringent. General Electric (NYSE:GE) and Caterpillar (NYSE:CAT) currently dominate the addressable markets with their reciprocating engine technology shipping an estimated $3.5 billion to $4 billion into the space last year. With $82 million in revenue for FY2011, Capstone is capturing only a fraction of the total market opportunity.
During the fourth quarter FY2011, Capstone set records for product orders as well as product revenue. New product orders totaled $41 million for Q4 on the strength of the developing U.S. shale gas market and strong order flow from Russian oil and gas and combined heat and power markets.
Record new product revenue of $19.2 million was generated in Q4, up from Q3's record $18.9 million. Total revenue was $35 million in the first half of FY2011 and jumped to $47 million, an increase of 34 percent for the second half of FY2011. Unfortunately, product shipments were constrained during Q4 due to supply chain problems and part shortages as vendors struggled to meet the required production ramp up. Products had to be diverted from aftermarket operations to meet new product demand impacting not only revenue, but also gross margins as aftermarket accessories, parts and services contribute higher gross margins than new product sales. The company appears capable of recovering from its supply chain difficulties as the business continues to grow.
Despite record new product revenue and improving gross margins, supply chain constraints and other growing pains left the company reporting a loss of 12 cents /diluted share for Q4 FY2011, sending its stock tumbling as investors were expecting a much smaller loss for the quarter. Capstone set company records for total revenue, gross margins, and backlog during FY2011 and year-over-year the loss per share improved from a 34 cents loss in FY2010 to a loss of 16 cents in FY2011. For the company to become profitable they will have to continue these improvements through FY2012.
Global oil & gas markets had a major impact on Capstone’s business in FY2011 with the Russian associated gas market and the U.S. shale plays dominating the current backlog. Recent orders in these markets have the potential to do so again in FY 2012 and beyond. Capstone microturbines are installed at oil and gas exploration, production, compression, and transmission sites both onshore and offshore as highly reliable, low-emission, low-maintenance, and critical sources of power generation.
Capstone is a high-risk/high-reward play. If Capstone continues to grow revenue at or near the 30% growth rate they have achieved for four consecutive years, and delivers gross margin improvements by increasing selling prices and lowering direct material costs its shareholders will be rewarded. At the market close on June 22, 2011 the stock was trading at $1.42 with a market cap of $349M. For investors who have owned the stock for a considerable period of time, the road to profitability has likely been longer than desired, but sometimes it takes time to get the right people in place, to find your place in the market, and to get the flywheel spinning. Capstone’s flywheel is spinning now.
The author is long Capstone Turbine Corp.