Capstone Turbine: High Risk, High Reward

Perhaps no sector has had a wilder roller coaster ride over the past year than that of fuel cell companies. Nearly all fuel cell companies are micro caps. While micro cap stocks are generally volatile by nature, fuel cell stocks have seen especially extreme swings in valuation.

In 2013, a handful of fuel cell companies rose as much as 100 percent. In the first several months of 2014, they’ve seen their share prices plummet by 30 to 50 percent. One of the most interesting of those companies is Capstone Turbine (CPST). 

Capstone builds and distributes microturbines that are primarily used to power equipment in the oil and gas industry, but can be used to provide power to almost any machine. They are positioned as more energy efficient replacements for natural gas and diesel engines. They’re popular among manufacturers who have facilities in rural and remote locations because the microturbines can provide power when other sources may not be readily available.

Capstone rode the fuel cell upswing in 2013, going from $0.93 per share to a high of $2.33 per share by March of 2014. Since that time, the stock has dropped to its current price of $1.57 per share.

There are a number of reasons to be bullish on Capstone. First, the company has grown revenue and its backlog of orders for eight consecutive years. In 2013, it had all-time highs of $133 million in revenue and $171 million in pending orders. It also grew its gross margins from 14 percent to 20 percent.

Capstone bulls also point to the possibility that President Obama could use an executive order to place caps on carbon emissions. In that case, there would be unprecedented demand on the part of businesses to find power sources that don’t emit carbon. Capstone’s microturbines fit that bill.

However, there are also some risks associated with Capstone. For all of its revenue growth, the company has never turned a profit. Leadership has stated that its primary goal in 2014 is to cut costs and reach profitability. Its upcoming earnings release on June 12 will provide greater insight into whether the company will reach its goal.

Also, there’s some doubt as to whether the company’s microturbines are all that more inexpensive than natural gas or diesel powered engines. Capstone’s products certainly cost more upfront, but the company says the savings in fuel makes up for the upfront investment. However, developments in gas drilling and future suppressed demand for gas and diesel could drive those prices down. That would shrink any cost savings gained by using Capstone’s products.

Capstone represents an intriguing growth opportunity in the alternative energy space for microcap stock investors. There is certainly potential there. However, reaching that potential will depend on management’s ability to streamline costs and whether the company benefits from regulatory action.