2 Reasons Capstone Turbine Shares Are Now A Buy

Oppenheimer upgraded shares of Capstone Turbine Corporation CPST, noting that visibility into break-even has improved.

As such, analysts upgraded shares from Perform to Outperform and introduced a $2 price target. That said, the firm sees potential upside to its price target, if the company achieves profitability.

Analysts Colin Rusch, Noah Kaye, Kristen Owen and Luis Amadeo outlined the two premises behind the upgrade.

Rationalization of Overhead

The analysts said the company has effectively rationalized its overhead, while working through a difficult period for demand. With the planned move of its manufacturing to a more affordable space and managing its supply chain more aggressively, the analysts said the company is in a position to see material cost reduction on its manufacturing costs.

The analysts expect the gross margin improvement to propel the stock price higher, with the gross margin improvement likely to be sustained throughout 2019.

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EBITDA Break-even Likely In 2019

Oppenheimer noted that shares are trading at an enterprise value of $24 million, including $10 million in net cash, even as revenues approach $100 million, annually.

The firm thinks both sales and gross margins have bottomed and that Capstone Turbine is managing cash effectively. Additionally, the firm expects order activity to pick up, which should help the company to reach EBITDA break-even in 2019, as order activity translates into sales growth.

To incorporate Capstone's evolving cost structure, the firm lowered its 2018 revenue estimate from $90.6 million to $86.3 million and widened its loss per share estimate from 27 cents to 28 cents. The 2019 revenue estimate was lowered from $113.5 million to $108.2 million but the loss per share estimate was narrowed from 8 cents to 6 cents.