This ad is a re-hash of one that the Macro Trader folks started running a bit over a year ago, when the stock was around a dollar a share — in the 15 or so months since then it shot up to over $2 briefly and then fell back down sharply, including another trop of 15% or so after they released earnings last week.
The ad pitch has changed a little bit since the first time they ran it, so I’ll intersperse some of our original article below along with a few excerpts from the current ad so you can get the flavor of it — the general spiel is still the same, that this company with its small generators that can run on natural gas or methane is the solution to the “flare gas” problem… no more wasted gas, plenty of extra electricity, etc. etc. (We’ve also attached the original article to this piece, so the original comments from readers are at the bottom — you can jump in and add yours as well if you like.)
So what’s the pick? Here’s what we learn:
“BURNING MONEY: The Untold Story of America’s Raging Oil and Gas Boom
“INSIDE: Why Oil Drillers Are Burning off Enough Natural Gas to Power Washington and Chicago…
“Plus, How You Could Make a Killing on the Breakthrough That’s Turning This Wasted Gas Into Big Profits….
“there’s a big problem with this new American oil and gas boom you’re not hearing about…
“Oil companies drilling in America’s huge new reserves are now deliberately burning natural gas.
“That’s right! They’re simply getting rid of it.
“And I’m not talking about just a little bit of natural gas, either.
“But gobs of it!
“As The New York Times reports, every day, they are wasting ‘enough energy to heat half a million homes for a day.’
“And the Daily Mail reports that oil drillers are ‘burning off enough gas to power Chicago and Washington.'”
That’s from the first ad, this is the intro to the current one:
“Imagine a technology that could immediately reduce the cost of electricity for EVERYONE on the planet.
“It would mint millionaires, right?
“Today is your rare chance to be one of them…
“In short, the breakthrough technology you’ll discover today could completely change the way the world gets its power!
“As The New York Times puts it, “History just might repeat itself, with [this company’s energy breakthrough] revolutionizing the power industry just as the microprocessor did the computer industry.”
“Imagine if you had gotten into Intel way back in 1989, when it traded for less than $1 per share…
“Right now, you’d have 22 times your initial stake!
“Well, this technology I’m telling you about today holds an even bigger promise.”
So they’ve gotten, if anything, more hype-y since last year.
But that’s the basic issue (and promise) — that oil wells, particularly in places like the Bakken formation, are flaring off a lot of natural gas because it’s not worth the effort or expense to capture the gas, connect to a pipeline, and sell it to someone at the current low prices. Oil is much easier to transport, so you can pipe it right out of the well into a truck even if you’re nowhere near a pipeline — not so with gas.
Which means a lot of it is wasted, and that environmental standards are getting to the point where these companies aren’t allowed to simply flare off the gas by burning it at the wellhead.
And that’s where our top secret teased company comes in …
“A breakthrough technique for turning this excess gas into big profits has quietly emerged.
“For companies using this breakthrough technique, the results are astounding.
“And they could care less what the price of natural gas is.
“In fact, the cheaper natural gas, the better….
“Analysts agree that flaring wastes a valuable resource. Burned-off gas, after all, generates zero revenue.
“But imagine if there is a way for these drillers to turn all of that wasted natural gas into CASH…
“WITHOUT having to build expensive pipelines…
“WITHOUT having to build a processing plant…
“WITHOUT having to spend ANY money on infrastructure…
“Well, it’s now possible, thanks to a revolutionary technology….
“This unique tool converts the natural gas into precious electricity!
“Right at the drilling site. No power companies involved…
“And it does this cheaply, quickly and with little emissions.
“The drillers can then use this electricity to power their own operations.”
So that’s what we’re being teased about — a company that makes a little generator of some sort. In their words:
“It’s a tiny, portable electric power generator.
“These generators can burn several fuels, including natural gas, to generate electricity.
“So oil and gas drillers across the entire country can use these tiny generators to convert all the extra gas they find into precious electricity!”
Well, that sounds quite neat and tidy. Basic generator technology is certainly widespread and somewhat commoditized, including natural gas generators (though I’m sure most remote wells that aren’t near the grid are probably using Caterpillar diesel generators, since they’re the big stand-alone generator market leader), but it sounds like the teased company is doing something a little different.
“… these mini generators are quiet, clean and practically maintenance-free.
“They are eco-friendly. They can run 24 hours per day. They can be used individually or in bunches.
“They can burn a variety of different fuels to create electricity, including diesel, gasoline, methane and natural gas.
“The fact that it can run on a number of different fuels is something none of its competitors can claim.
“The generators don’t use oil, lubricants, coolants or even water. This eliminates transporting, storage and costly spill/leakage issues associated with other technologies.
“And the generators don’t require any power lines. They are portable, small and easy to transport. They have only one moving part.
“As Benjamin Rosen, founder of Compaq Computers Corp., explains, ‘The little [generator] has the same relationship to large power plants that the PC had to the mainframe… It puts the source of power at the user’s site.'”
That quote from Benjamin Rosen, by the way, is from 1997.
So without further ado, let’s release that feline from the bag and tell you that yes, they’re teasing Capstone Turbine (CPST).
I’ve never looked into Capstone before — they’ve been public for a long time (they IPO’d in 2000, in the heat of stock market excitement, and tripled on their IPO day), and it’s mostly been a very, very quiet company since that initial surge of excitement. The product sounds very cool — miniature turbines that are easily portable, use “air bearings” to make them low-maintenance, and can burn everything from coal bed methane to raw sour natural gas and turn it into electricity. But it’s been more or less the same story since they got Bill Gates and lots of other investors excited before their IPO 14 years ago.
You can look at them as a cautionary tale for story stocks, since they went public with the expectation that they might become profitable within a year or so but have never posted even an operating profit (or even a gross profit, meaning you could sell the generators for more than it cost to build them, until last year) and have continued to fund themselves through equity offerings of various kinds. Or, if you’re more optimistic, you can look at them and see the persistent power of an idea that makes sense and should, someday, be able to make money.
If we ignore the long, long history of this story, as we probably should since we’re interested in the present and future Capstone and not in the potential promise Bill Gates was interested in way back when Microsoft was a growth stock, then there is at least a little string of hope that makes you want to pull on it. There’s a good note on the potential promise and the big addressable market from the Fool here. There has also been lots of insider buys, but a skeptic would say that it looks like it’s part of a coordinated campaign to try to create the impression of insider buying — lots of buys over the last several years, but almost all of them are for just a few thousand dollars, and not likely big enough for insiders to keep from diluting their own holdings due to the consistent equity offerings that they seem to use to raise working capital every year or so.
The company is still quite small, with a market cap of about $300 million (and that scary low sub-$1 share price, which if it remains this low will mean a real delisting threat — Nasdaq currently has them with a warning, they have to trade over a dollar for ten consecutive days before mid-June to avoid delisting).
They have been increasing revenue for quite a long time, which is nice, but those increases haven’t been enough to make them profitable — they have boosted revenues in many years by 30-50%, but costs have kept up with revenue pretty easily. It’s hard to see them jump-starting production (and demand) fast enough to abruptly become profitable and achieve some economics of scale, but I don’t know at what level of production and revenue they could potentially become profitable — gross profit has ticked into positive territory lately, so it’s possible that they’re getting closer, but you’d have to dig in and find a real reason to believe that the decline in operating losses could speed up. Operating expenses, including R&D and Selling, General and Administrative (SG&A) costs have been pretty consistent over the last seven or eight years, growing much less quickly than revenue, so if they can figure out how to raise revenue without raising the cost of revenue thought ought to be able to make a profit. Eventually. And that was an “if,” it has taken ten years for the cost of revenue to drop from 200% to slightly under 100%.
As of the last quarter, they were continuing to get closer and closer to breaking even. Their revenue rose by about 15%, backlog kept going up, but that backlog doesn’t seem to move into “sales” that quickly — the backlog is almost twice their annual sales. They have been able to boost their gross margin a bit, but not so sharply that they can become profitable without some really substantial revenue growth — given their operating expenses of $35-40 million a year and a gross margin that might, charitably, get up to 20% if they continue improving, they need revenue of about $200 million to break even. They got to $133 million in the fiscal year that ended in March, and the losses keep getting smaller, but I’ll be a little surprised if they can turn a profit before 2016 or 2017 even if the current positive performance trend continues.
Analysts do seem to agree that they’re going to finally break even next year (their fiscal year starts on April 1), and most of them offer a “buy” recommendation for CPST (though not necessarily a “strong buy”). But I typed that last sentence in March of 2013 and it’s still true … analysts now expect that profit to come “next year,” which is now FY 2016. They see continuing growth of 25% a year, which, if they’re right, would be about the same revenue growth trajectory they’ve been on for ten years, but last year was only 15% so there’s some possibility that growth is tailing off — it looks to me like they really do need the 25% growth in revenues each year for a couple years to get to a profitable level unless they slash operating expenses. If you can convince yourself that they’re going to run that revenue growth down to the bottom line, hopefully improving gross profit margins further (they got as high as 15% last quarter and have been improving, which is important), then they might actually post a per-share profit sometime.
Sound like your kind of investment? If it was a new company today offering this product, without the specter of 10+ years of selling these mini turbines without ever being able to make money on them, I’d be a lot more enthused — so I don’t know if I’m coloring my expectations unfairly because of their long history of disappointing failure to hit critical mass, or if I’m wisely being cautious given the difficulty of building what sounds like a perfectly logical and appealing business. There are plenty of folks in the oil and gas business who seem excited about them, or at least about the potential they offer. I’ll have to research them a bit more before I can make up my mind, but if you’ve got any experience with Capstone, or an opinion to share, I’m all ears — shout it out with a comment below.