Positive Cash Flow Charges Up Maker of Turbines

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Capstone Turbine Corp.’s report last week that it had positive quarterly cash flow from operations for the first time in its 22-year history wasn’t a fluke, according to analysts.

After years of fits and starts, the company that makes microturbines that can power everything from hybrid cars to oil exploration sites is benefiting from a new management team that has kept costs under control – and better understands customers intrigued by but wary of an unproven technology.

“Capstone had this new cool technology with no track record, and they were trying to sell it to plant managers who were under orders to provide electricity at a 99.9 percent up time,” said Ardour Capital Partners analyst Walter Nasdeo, who has followed the company for years. “It was a very big challenge.”

Nasdeo credits changes made by Chief Executive Darren Jamison, who, after assuming his position in 2006, cut costs and managed to create the track record; he struck cut-rate deals with customers who saw the potential savings of using the generators to lower power and heating bills.

More recently, Capstone received good reviews from its installation of three $100,000 65-kilowatt turbines on the roof of the Four Seasons Hotel Philadelphia in October 2009.

Marvin Dixon, the hotel’s director of engineering, said he was able to convince his bosses to install the microturbines after explaining how they could cogenerate – that is, heat rooms and water with the excess heat produced as they made power. That cogeneration ability meant that the three generators could pay for themselves in three years.

In addition, because the microturbines have low emissions, they would provide a nice public relations boost by reducing the hotel’s carbon footprint. The three turbines provide 33 percent of the hotel’s electricity, and all its heating and hot water needs. Managers of other hotels and officials from the U.S. Department of Energy have toured the hotel.

“We are doing a great job of using our waste heat,” he said. “The Capstone turbines are not only quiet, but I run them hard and hardly have to take them down for maintenance – maybe every six months or so to change out the filters.”

Still, the company has had to struggle.

Another key decision Nasdeo made was to de-emphasize a market for smaller turbines that previous management had expected would be the company’s leading market. The turbines generate 35 kilowatts and are used to power hybrid vehicles and as backup generators for smaller buildings, but the market for them proved too small.

But just as the company was rolling out an expanded product line of turbines that generate up to 200 kilowatts, the global credit crunch and recession left potential customers wary of making large capital investments. The company reported a net loss in its fiscal third quarter, which ended Dec. 31, though revenue was up about half to $24.2 million.

Merriman Capital Inc. analyst Michael Lee projects that Capstone could reach operating profit by March 2012. He notes that Capstone shipped 171 microturbines during the last quarter, 40 percent more than a year earlier. Its order backlog also was up 8 percent to $84.7 million.

“They now not only have a strong backlog but have been able to put through two price increases, which helps margins,” said Lee, who initiated coverage of the company last month with a “buy” recommendation. “It used to be that they’d turn over inventory only once a year, and now their rate is up to 3.8 times. They clearly have momentum.”

Four out of six other analysts who cover the company also rate it a “buy,” according to Bloomberg News. Still, investors likely will want to see more quarters like the last one before they’ll dip back into the stock.

Capstone’s shares trade under $2 but once were priced as high as $94 after a much anticipated 2000 initial public offering. Clean-tech investors were hyped up by the company’s pioneering microturbines, including the fact that they used proprietary air bearings that need little maintenance.

“More than ever before, we can all clearly see the path forward from here to profitability and sustainability for our clean and green microturbine technology company,” Jamison said during a Feb. 2 conference call.

He did not return calls for this story.

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