Capstone Turbine Makes Me Eat Crow

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There are a select few companies that, if mentioned in bad light around here at The Motley Fool, mean an instant deluge of hate mail in the form of emails and article comments. Capstone Turbine (NAS: CPST) is one such company.

I like my crow with ketchup
Back in late March I included Capstone Turbine in my weekly series, "3 Stocks Near 52-Week Highs Worth Selling," and cited that its penchant for losing money and depleting shareholder equity were reason enough to avoid the stock. Although I have been right to some extent -- the stock did fall from $1.95 to its current close of $1.06 -- I'm willing to admit that my long-term perspective on Capstone Turbine may be all wet. It's not easy to admit when you're wrong, but in this case, Capstone's second-quarter results released last night aren't nearly as dire as my prediction indicated back in March.

Capstone Turbine had average revenue growth of 27.7% over the past five years, and its results last night didn't disappoint either. Sales rose 46% for the quarter and $3.2 million sequentially as the company shipped 172 microturbine units. Ironically, this was actually a decline from the first quarter when the company shipped 174 units, but with pricing improving the company was able to increase sales and more importantly, margins.

The most impressive aspect of Capstone's report -- and the real reason I'm eating crow -- is based on the fact that it actually made money. Sure $0.00, or $1.3 million, may not seem like much, but this is, from what I can tell, the first profit Capstone has ever turned. Margins also came in at a record for the quarter at 6% of revenue, reversing years of losses.

...but I have been right before
Now don't get the wrong impression that I've made a complete 180 and decided to throw a buy recommendation behind Capstone, because I'm not quite there yet.

While a favorable product mix did help Capstone's margins, the main reason the company was able to turn a profit was because of a revaluing of the company's warrant liability that resulted in an $8.6 million gain. The company's operations would still have lost $7.2 million for the quarter. This is 15% better than the year-ago period and does show a steady rate of improvement, but the company has yet to demonstrate it can be operationally profitable.

I'm also not sold on the fact that Capstone can compete in a world where General Electric (NYS: GE) and Caterpillar (NYS: CAT) dominate. Even smaller turbine players like Generac Holdings (NAS: GNRC) and Dresser-Rand Group (NYS: DRC) could chip away at whatever share of the market Capstone winds up with.

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I have to admit that Capstone has come a long way from the money-losing, shareholder-equity-destroying company it was five years ago. Still, it has some work left to do before I will remove that label in its entirety. Show me an operational profit from Capstone, and I'll show you a green thumb. Until then, I remain skeptical, but much, much less than before on Capstone's prospects.

At the time this article was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He has eaten crow quite a few times this year. You can follow him on CAPS under the screen name TMFUltraLong , track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's always willing to share a slice of humble pie.

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