Capstone Turbine Stalling Out


Increased oil and gas production domestically hasn't had an impact only on explorers and producers. A variety of other businesses are benefiting, including Capstone Turbine (NAS: CPST) , which provides power for drilling operations.

The company has ridden increased production to some financial success, but right now the company is still posting a net loss. Will conditions improve enough to make this a good investment?

Revenue during Capstone's fiscal third quarter was essentially flat quarter-over-quarter at $27.5 million. But improving margins and lower R&D costs meant that the company's adjusted net loss fell 18%, to $5.9 million, although GAAP losses widened from year-ago levels. Still, both results were worse than analysts and investors expected, and the stock has fallen further since the results were announced.

Management is expecting big improvements during 2012, with gross margins moving up toward 35%. If that prophecy comes true, the company would be reporting a profit even at today's revenue level. Pricing, cost reductions, and warranty-related improvements could drive the company to meet this goal, and if it can get there, this could be a big winner.

Cash is king
The issue for Capstone right now is the company's cash level. Cash on hand has fallen from $33.5 million on March 31 to $22.9 million at the end of last year. If the company can't improve margins rapidly and continues to post losses, I have concerns it could run out of cash fairly quickly, even though the cash level increased $2.6 million last quarter, because that was driven by warrants, not operating profits.

Drilling slow down
The rapid expansion of oil and gas drilling in recent years has helped drive Capstone's growth. But Chesapeake Energy (NYS: CHK) , Quicksilver Resources (NYS: KWK) , and others are starting to slow down expansion due to low natural gas prices. This could put a cap on Capstone's growth potential. Unless this trend reverses, Capstone investors could be in for some disappointment in coming quarters.

Don't buy just yet
If Capstone can improve margins, this could become a great stock value, but right now it's just too risky a bet. Revenue has grown YOY but new orders haven't kept up with revenue, putting future growth at risk. And continued losses will put a real strain on the company's cash.

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At the time thisarticle was published Fool contributorTravis Hoiumdoes not have a position in any company mentioned. You can follow Travis on Twitter at@FlushDrawFool, check out hispersonal stock holdingsor follow his CAPS picks atTMFFlushDraw.Motley Fool newsletter serviceshave recommended buying shares of Chesapeake Energy. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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