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ENERGY—Capstone’s Marketing Problems a Puzzle to Analysts

Six months ago, Chatsworth’s Capstone Turbine Corp. looked like it was ready to cash in on California’s energy crisis. Companies worried about possible rolling blackouts would turn to the affordable and efficient micro turbine power generators pioneered by Capstone. But as California plods through the summer and the crisis abates somewhat, Capstone has yet to profit from its opportunity. The company builds 30- to 60-kilowatt generators that run on natural gas, using state-of-the-art microturbine technology similar to a jet plane engine with one moving part a turbine suspended in air as it spins. “There’s a marketing problem out there that I can’t put my finger on,” said Craig Shere, an equity analyst for Standard & Poor who at one time expected the company to sell 3,000 units by the end of the year. But after six months, the company is well short of Shere’s projections, with 728 units sold through June 30. “I know there’s a need for this product. But the question is how quickly will the market accept it and how much market share can this company get,” Shere said. Others are asking the same question. That includes Microsoft co-founder Paul Allen, an early investor in the company, who sold all 838,000 shares he owned early this month. Other analysts are also worried about the company’s performance. Merrill Lynch’s Sam Brothwell cut his sales estimates for this year from 2,800 units to 2,100 and from 7,900 to 4,100 for 2002. “They’re just not generating the kinds of sales that we expected and we frankly don’t know why that is,” he said. The company’s sales staff was hailed for earning two 100-unit contracts earlier this year, but has kept a low profile since then, Shere said. Capstone Chief Financial Officer Jeffrey R. Watts said marketing micro turbines is a time-consuming, difficult job at best. “The process is long and takes time. It can take anywhere from 12 to 16 weeks in meeting with customers and getting an energy audit (evaluating their needs) and coming back to meet with them again,” Watts said. “We spend a lot of time educating people about power generation and requirements, so it’s an education process. All they know is that they turn on a switch and the lights come on.” Nevertheless, CEO Ake Almgren said earlier this week he is optimistic about meeting the company’s year-end goal of 2,000 units. Almgren told investors in a conference call last week that Capstone expects to sell 600 units in the third quarter and 4,000 units in 2002 when, he insists, the company will become profitable. “During the second quarter, we substantially enhanced our production and our sales efforts,” he said, adding that the company has expanded its marketing efforts in Europe. Brothwell said the company’s troubles may stem from skepticism about a new, unproven technology versus generators that run on diesel or electricity, made by Honeywell International Inc., Ingersoll-Rand Co. and Caterpillar Inc. Brothwell said many companies panicked in the first days of the energy crisis and opted for old-technology generators rather than try Capstone’s refrigerator-size micro turbines. Brothwell, like Shere, has downgraded Capstone stock from a buy to accumulate. Capstone’s stock price has dropped steadily in recent weeks, going from $39 in mid-May to $16 a new 52-week low on July 10. The 52-week high of $98.50 came on Aug. 31, 2000, two months after its initial public offering. Shere said the nearly $2 one-day drop to the new low was sparked by Allen’s stock sale. Also, according to filings with the Securities and Exchange Commission, Almgren has sold 155,000 shares of Capstone stock since February, Watts 250,000 shares. “When you have insider selling and a large venture capitalist selling his stock, people start to get nervous and you have a slide like this,” Shere said. The company’s stock had climbed to $38.25 on May 29 after hovering most of February, March and April in the $20 to $29 range. Since then, the stock has steadily headed south to its July 10 low. On Thursday, it closed at $12.81. Shere said a steady stream of small contracts through the spring buoyed the stock price, at least until orders began drying up last month. “They need to get a few big contracts to get back on track, but we’re not seeing that,” he said. Last week the U.S. Department of Energy awarded Capstone a $3 million contract to develop heating, cooling and power generation systems for its own buildings. But announcement of the contract was not enough to have an impact on the company’s stock price, which has remained flat. Almgren said he believes the company will meet its goal for the year with increased sales of its new 60-kilowatt unit in Asia and Latin America. However, he did not address the paucity of sales in domestic markets hit hard by energy shortages. Nevertheless, the company’s second-quarter figures, even though they continued to show net losses, indicated improvement over numbers for the same period last year. Capstone reported a net loss of $10.3 million on $13.6 million in revenue in the most recent quarter of 2001, up from a staggering net loss of $429.1 million on $6.1 million in revenue in 2000. In 2000, the company lost $591.3 million, due mostly to $559 million worth of charges for research and development costs. In 1999, it lost $56.2 million.

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