Friday, July 13, 2012

Capstone Turbine Ramps Revenue, Earnings Not So Much

Capstone Turbine Corporation (CPST:  Nasdaq) made it to the Efficiency Group of our Mothers of Invention Index because of its line of low-emissions micro-turbines.  The company has sold 6,500 of them around the world.  The fruits of this building installed base are evident in Capstone’s top-line, which has increased in each of the last three years and reached $109.7 million in the fiscal year ending March 2012.  The bottom-line has followed in the same direction, but is still in the red.  In the last fiscal year, Capstone recorded an $18.8 million loss. 

The $18.8 million loss included a $14.0 million benefit from the change in fair value of warrants Capstone issued in the course of capital raises over the last five years.  Accounting treatment of warrant liabilities is a non-cash item, whether a benefit associated with the write-down of the liability or a charge resulting from a write-up of the liability.  This means the net loss was closer to $32.8 million.  In the previous two years Capstone recorded charges associated with outstanding warrants. 

All that marking up and marking down of that illusory warrant liability makes Capstone’s bottom line a bit noisy, not to mention useless.  That is why cash flow from operations is such a valuable measuring stick for companies like Capstone.  In the last fiscal year Capstone used $21.4 million in cash resources to support operations.  The company used a total of $21.9 million in fiscal year 2011 and used $36.6 million in fiscal year 2010. 

The take-away from this little stroll through Capstone’s cash flow from operations is this:  the company’s operations are simply not producing the results one might expect for a company with a significant installed base.  Investors long in CPST will probably roll their eyes on this statement. 

The bull case points to Capstone’s large addressable market and the great promise in the oil and gas industry and manufacturing.  Capstone touts a variety of applications for its product from powering oil and gas field equipment or providing economical power in remote locations.  Then there is the flexibility of its technology in accepting a variety of fuels from waste gases, to propane, to wet flash gas at gas well heads.

Frankly, I am also impressed with Capstone’s product line.  However, I am disappointed in management’s performance in conserving the company’s ample cash reserves.  Captstone has dipped into the capital market well several times with what has turned out to be dilutive equity offerings.  Total shares outstanding have increased 72% over the last three years.  There are 26.5 million warrants waiting in the wings for exercise that could bloat shares outstanding by another 9%.  

Dilution can be tolerated if at the end of the day there is more value to spread around.  Unfortunately, there is just something about a big bank account that brings the spendthrift out in a management team.  Even if that accusation cannot be made against Capstone’s management them, I would like to see the company undertake a cost-cutting program of some kind and more value falling to shareholders.  Even the Capstone bulls could not disagree with that.


Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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