BERKO: Turbine maker a speculative buy
Friday, November 16, 2012 7:00 AM
Dear Mr. Berko:
A good friend, who is a mechanical engineer, just bought 8,000 shares of Capstone Turbine Corp., a company he believes offers the best and cheapest power-generating sources in the country. The stock trades at $1.03 and I’d like to buy 5,000 shares. What can you tell me about this company?
S.A., Syracuse, N.Y.
Capstone Turbine (CPST-95 cents) is a highly speculative, $187 million revenue company, homeported in California with sales offices in China, Singapore, England and Mexico. The CPST people make microturbines ranging in size from 30-kilowatt to 1-megawatt configurations. The turbines run on low- or high-pressure natural gas, flare gas, diesel, propane, biogas (anaerobic, waste water treatment) and kerosene. And one of CPST’s most prominent and successful microturbine installations is in your hometown. Syracuse University’s impressive Green Data Center has 12 CPST Hybrid UPS microturbines providing power to the entire facility. Using at least 50 percent less energy than a comparable system, CPST’s low-emission turbines produce electricity, heat and cooling power from a single burn of natural gas. The exhaust heat from the turbines is piped into double-effect absorption chillers, using the heat energy to cool the data center’s computers. The same microturbines provide heat and cooling for the university’s nearby office buildings. And the savings over traditional power sources is enormous. These turbines have only one moving part, no gearbox, no other mechanics and they don’t require lubricants. The energy is wonderfully clean, beautifully green and quite affordable.
CPST’s turbine design is protected by numerous patents. According to an engineering professor at Syracuse University, CPST’s design integrates an aero-based turbine, a magnetic generator, simple but sophisticated power electronics and air bearing technology to produce impressive and highly efficient results. Fortunately, some power users are paying attention. In the past decade, revenues have grown from $3 million to more than $110 million. Unfortunately, during that decade CPST has never made a profit and combined annual losses have exceeded combined revenues by significant millions. Fortunately, CPST has more than $45 million in the till and only $14 million in debt, and management expects the company to be profitable in its next fiscal year with $190 million in revenues. In the coming few years, CPST’s superior design could generate more than $500 million in revenues that should be accompanied by some healthy per-share earnings.
CPST’s low maintenance, easy-to-install, spinning microturbines are considered cutting-edge technology. Boston’s huge South Shore Hospital is installing five of CPST’s extremely quiet, ultra-low-emission, 200-kilowatt turbines. CPST’s installation will provide the 100-year-old Boston hospital with 35 percent of its power needs in a small space measuring 30 by 8-by 9.5 feet. Using inexpensive natural gas, this installation expects to reduce South Shore’s power costs by nearly 50 percent a year. The success of this installation will certainly encourage other hospitals, high-rise offices and government buildings to consider this money-saving technology.
CPST is a cheap stock that may, and I must emphasize the word “may,” someday not be a cheap stock. It has a real 20 cents per share book value and 300 million shares outstanding. It’s also worth noting that the Vanguard mutual funds own more than 20 million shares, while BlackRock, Lord Abbett, Northern Trust, State Street and a few other institutions own in excess of 60 million shares of this “el cheapo.” That’s not unimpressive. I should warn you, however, that my 10 or 12 cheap stock recommendations over the past 35 years have not done well. And I must tell you, no matter how good CPST looks, the reason it sells for 95 cents a share is that the investment community taken as a whole believes that’s all the stock is worth. If you can afford to risk $5,000, then I’d say this could be a good speculation. You should also know that in 2001, quite a few fools were paying over $9 a share for CPST.
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