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The Big Spin

Capstone Turbine Corp., which builds mini-power generators for office buildings and industrial facilities, is spinning its share price to new highs.

With some significant contracts spurred by the energy efficiency provided by its microturbine technology, has this company’s day arrived? Or will it sputter and stall as it has in the past?

Sales of the Chatsworth company’s generators, each about the size of a commercial refrigerator, have been brisk enough to boost the company’s stock by 49 percent since the end of April. The stock is soaring even though the company isn’t profitable yet, and probably won’t be for another two years.

Capstone’s sales rose so quickly that by the time Walter Nasdeo, an analyst at Ardour Capital in New York, raised his target price to $4, the stock had already blown past it. Capstone currently trades for around $4.20.

“I’m re-evaluating it right now,” said Nasdeo, who maintains a rating of “accumulate” on the stock. “Right now, with all these press releases, it is putting really significant interest on the stock. People are jumping into it.”

More than 500,000 shares of the company have been trading every day extremely high for a small company, Nasdeo noted.

Revenues for the latest quarter totaled $9.3 million, a 60 percent increase over last year over, according to a June 13 filing with the Securities and Exchange Commission. Capstone also reported back orders worth $27.9 million, a 458 percent gain since last year.

On June 2, the company announced a $2 million deal to sell generators to a caviar farm in Russia. On June 12, it hailed a $3.5 million contract to install power supplies in three New York City office buildings. Then on June 16, Capstone landed a $1.1 million deal with Pemex, Mexico’s state-owned oil company, to supply power turbines for offshore platforms.

Jim Crouse, executive vice president for sales and marketing, said there were two factors behind Capstone’s boom: new management and new products.

Chief Executive Darren Jamison came aboard 18 months ago. Crouse joined the company then, too, along with a new sales crew.

“We’ve focused on building relationships with our distributors, and also we’ve developed and released a couple of new products,” Crouse said.

Besides internal changes, Crouse cites the jump in oil prices as benefiting the company. High prices translate to more drilling and extraction operations, resulting in more deals like the Pemex sale.

The company’s turbines are becoming popular in the oil industry because drillers can power the generators with on-site natural gas, dropping energy costs to almost nothing.

Likewise, high electricity prices motivate building owners to take control of their own power generation. Using Capstone’s microturbines to generate power can be cheaper than buying from utilities.

The revitalized energy market has stoked investor enthusiasm for Capstone. Sanjay Shrestha, an analyst with Lazard Capital Markets in New York, has set a target price of $6 for the stock. Shrestha projects 2009 revenues of $58 million, an 85 percent increase over the 2008 revenues.

“Capstone delivered a strong finish to fiscal 2008, building an excellent foundation for potential solid growth in the coming years,” Shrestha wrote in a note to investors June 13. “Our target reflects shipment projections for 2012 of 400 megawatts, and we believe this is clearly achievable given product economics, sales efforts and recent traction.”


New models

Since its founding in 1988, Capstone has sold more than 4,000 microturbines and at one point controlled 75 percent of the small generator market. Its competitors use older technology; Capstone has the latest technology in its field, analysts said.

Yet the company has consistently lost money. Like many alternative energy companies, its stock price spiked briefly in 2000, climbing as high as $94 per share. But in recent years it has traded as a penny stock.

Capstone has gone through four chief executives since 2005. Two years ago, the company had a total employee turnover rate of 38 percent. That figure dropped to 10 percent last year.

Product development has been a key factor in the sales increase.

Until a few months ago, Capstone only sold microturbines with a capacity of up to 200 kilowatts. The company recently came out with models that have a capacity of 1,000 kilowatts, allowing the company to compete for larger projects.

“These models have more than tripled our addressable market,” Crouse said. “Part of what was keeping Capstone back was that we hadn’t educated the market about how we can run turbines in parallel so our market size isn’t limited by the turbine size.”

A Capstone turbine works much like a jet engine except that the bearings are air cooled. That eliminates lubricants or greases and minimizes maintenance downtime. The turbines are designed to run 24 hours a day, every day of the year. A single unit costs between $45,000 and $1 million, depending on power-generation capacity.

Turbines produce about one-tenth the emissions of an internal combustion engine, Crouse said, adding to the technology’s appeal amid the growing “green” sector.

Also, the turbines can be engineered to run on a variety of fuels. Oil rigs and pipeline operators can use natural gas, which is available on site, while farms and bio-fuel plants can power the turbines with methane from decaying greenery or manure.

Other fuels that power the turbines include diesel, bio-diesel and, soon, ethanol.

Exhaust heat from the turbines can also be used to heat a building or its water supply.

The low emissions and reuse of exhaust make the turbines a favorite with environmentally conscious government officials and building managers. Officepower, which bought the turbines for the New York City office buildings, cited Mayor Michael Bloomberg’s program for lowering air pollution as a factor in its purchase decision.

All four analysts who cover Capstone rate the stock as a “buy” despite their own projections showing the company won’t be profitable for at least two years.

For fiscal 2008, the company lost $36.1 million. Nasdeo predicts a net loss of $16 million for 2009, while Shrestha pegs it at $28 million.

However, by 2012, Shrestha predicts a net profit of $85 million, or earnings per share of 50 cents.

“Management has indicated that the company should be cash flow positive by December 2008,” Nasdeo wrote June 13. “Overall, we are pleased with Capstone’s forward motion throughout fiscal 2008.”

Nasdeo said a concern remains about Capstone’s ability to fill orders as its turbines become increasingly successful.

“Our one cautionary note is how smoothly the company will ramp up production to meet the demand for the new product introductions while keeping both on schedule and on budget,” he said.

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