Capstone Shares Plunge on Missed Expectations

Once the darling of investors looking for a bright spot in the midst of the energy crisis, Capstone Turbine Corp. saw its shares plunge nearly 31% on Wednesday after disclosing that sales of its electrical mini-generators will be only a fraction of previous expectations.

Capstone’s shares traded at more than $37 as recently as May, when the state faced the prospect of rolling electricity blackouts and businesses were scrambling to find reliable sources of power.

One analyst said the Chatsworth-based company, which makes a clean-burning, refrigerator-sized electrical generator that can run on natural gas, methane and a variety of fuels, may have fumbled its sales strategy.

“Going from sales of 400 generators in the second quarter to just 80 in the third is a horrendous drop. It’s not just a slowing economy,” said Sam Brothwell, who follows Capstone for Merrill Lynch in New York.

Earlier this year, Capstone forecast that it would sell 600 generators in the third quarter.

Although the company had relied on a network of distributors to sell its 30-kilowatt and 60-kilowatt generators, it established its own sales subsidiary to focus on the California market during the height of the state’s energy crisis.

Brothwell said the move put Capstone into competition with its own distributors in what looked to be the company’s strongest market.

“I think that might have created problems with their marketing efforts,” Brothwell said.

On Wednesday, Capstone was the third-biggest loser on Nasdaq, with nearly 8.5 million shares changing hands. Shares fell $1.53 to close at $3.47. They’ve lost 87% of their value this year.

Capstone said it expects to report revenue in the range of $3.2 million to $3.4 million and post a loss per share of between 16 cents and 18 cents in the third quarter. In the third quarter of 2000, the company had a loss of 11 cents.

Capstone is burning cash at a rate of $19 million a quarter but does have some room to maneuver because it still has $180 million in cash.

“We believe we have sufficient financial resources to weather a significant downturn in the economy while continuing to execute our business plan,” Ake Almgren, president and chief executive of Capstone, said in a statement. He could not be reached for comment.

Capstone first began selling its turbines in 1998 and has shipped more than 1,700 to customers since then. The turbines are used in a variety of ways, the most common to provide electricity to a building or some other facility. The company also has experimented with using the turbines as power generators for hybrid electric buses and other vehicles.

The company gained prominence during the rolling blackouts that plagued California last year and earlier this year. Companies purchased the turbines as an alternate source of power that could be used during the blackouts or when the local utility asked them to reduce power usage. A 30-kilowatt generator sells for $30,000 to $35,000 and can power a small commercial center or three to six homes.

“A perception was created that this was essentially a silver bullet that could be used against the energy crisis and that Capstone was in a position to ship thousands and thousands of the units,” Brothwell said.

The company was cited in numerous news reports and energy conferences as a source of what is called distributed generation--essentially electrical power than can be generated at the site where it will be used.

“In reality, this was a company with an early-stage commercial product--one that wasn’t quite ready for prime time,” Brothwell said.

With its low stock price, Capstone might become the target of an acquisition, the analyst said. Its cash position combined with a stack of tax loss carry-forwards that could be used to offset future taxable income, give the stock a cash value of at least $3 a share, Brothwell said. And that doesn’t factor the company’s valuable turbine technology.

“Certainly, the company is at an attractive price right now,” he said.

And while California’s energy crisis failed to create as big a push for distributed generation resources such as the Capstone turbine, energy trends and recent world events still favor the product.

Brothwell said one of the lessons of the terrorist attacks on the World Trade Center in New York last month was the vulnerability of large infrastructure facilities such as phone circuit switching stations and power plants. Capstone’s technology could provide protection against attacks on power installations by dispersing power generation.

Moreover, Brothwell said the company is sure to be dealing with a horde of disgruntled shareholders, upset about the missed sales target and huge drop in the company’s share price.