Why Capstone Turbine Is Capable of Getting Better
The maker of turbine systems, Capstone Turbine (CPST), is a risky play in a low oil and natural gas price environment. The drop in oil prices has led to a reduction in the rig count and drilling activities as oil and gas companies have restrained budgets. Also, the recent devaluation of one of its biggest partner's currency, the Russian ruble, has led to a significant drop in its sales.
Why Capstone is a risky investment
So, investors should avoid the stock until the rebound in oil price takes place as the company is facing a number of headwinds.
Capstone gets approximately 60% of its revenue from oil and gas markets across the world. Now, oil prices have dropped tremendously since last year, leading to a drop in Capstone's revenue performance and backlog. Looking ahead, oil and gas prices are not expected to stabilize any time soon, and this will continue to impact Capstone's revenue.
A look at the positive
However, its service business looks well-positioned as it is gaining traction as far as the backlog is concerned. Earlier this year, Capstone's service revenue grew 7% year-over-year due to increased contracts for its factory protection plan, or FPP. In fact, the backlog for its FPP service contracts had increased 30% annually to $61.2 million earlier in the calendar year. This record service revenue backlog highlights Capstone's growing install base of microturbines.
This growth in the service contract backlog is due Capstone's cost efficient FPP that enables the customer to reduce the cost of ownership as compared to traditional alternatives. The company has a large fleet of operating units, with 20% of its units in the FPP segment, which will help Capstone expand and scale its aftermarket services business.
Moreover, the company expects the product mix of aftermarket services to increase as a percentage of its total revenue as its global fleet continues to grow. In fact, it expects to sign more long-term factory protection plan contracts.
Thus, looking ahead, Capstone should benefit from the diversification of its business. It is making significant progress in growing and nurturing its distribution network, enhancing product reliability, and expanding into new geographies that should drive its growth in the long-run.
More importantly, the expansion of the distribution network will allow Capstone to generate more growth going forward. The company has 88 distributors and 9 OEM partners that are spread across 150 locations in the world. Additionally, Capstone has approximately $1.5 billion worth of project opportunity pipeline. It is gradually maximizing this opportunity with diversification in countries like Latin America, Africa, Asia, and the Middle East, and the expansion of the distribution network will play a key role in this regard.
Capstone Turbine could be a good stock to stock to hold in the long run. Though the company's short-term prospects aren't favorable, an expected improvement in the oil market and the company's increasing service backlog could act as growth drivers in the long run. Moreover, analysts expect Capstone's earnings to grow at an annual rate of 25% for the next five years, greater than the industry average growth rate of 17.56% for the next five years. Thus, investors should keep a close eye on Capstone Turbine as it could get stronger in the long run.