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Author: Indiscr33t Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1967  
Subject: Re: Where they at Date: 1/31/2012 2:30 PM
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First, let me state that no matter what I post on here, I am here SOLELY because of Capstone's recent venture into Oil and Gas. If Oil and Gas were to no longer buy their products, I'd be out immediately, regardless of loss/gain.

With that said, I agree, management is overly optimistic. Their backs, and the company's back, is against a wall. Perform or die. Everyone knows that. That's why despite the large orders coming in from Oil and Gas in Russia, nobody cares. The market is in 'show me' mode.

With that said, I cannot think of a better motivation to succeed than if you do not, that's about it, time to call it quits.

Capstone currently has a gross margin of 6%. The figure they're shooting for is 30%. Seems like a stretch right? The thing is that their revenue has been increasing higher and higher, with higher pricing adding to the margin in the backlog (turned over 12 months). If you could just apply a smaller margin to a larger revenue stream, then the same profitability effects may be achieved.

They burn $8M per quarter. That's their operating costs. 20% gross on 40M quarterly revenue, and bam, breakeven. We're at 6% gross now. Management said the backlog has higher margins baked into it, and they expect to squeeze only another 7% from price hikes on products. The bulk of the rest must come down to cost reduction. As you can see from the newswire reports, the orders are much larger, and in many cases to a single customer. I believe that this helps them streamline their costs because they can essentially mass produce the microturbine. Supposedly they are also changing the set-up of C200's within the ICU-90 connex that will cut costs as well. Maintenance plans bought by customers are also high margin items. Materials for older C200's are still on-hand as their warranties require them. As those older models are retrofitted and upgraded to newer standards, the costs of those parts can be eliminated. As warranty costs (act like a bell curve) on C200's taper off, then margins go up. Capstone is hiring logistics partners with the sole purpose of cutting costs on parts from China. Overseas warranty facilities have been made in Thailand and Britain so that every time a turbine breaks, it doesn't need to be sent by boat back to Cali. This is how I see costs being reduced, the largest factor of which will be fewer, larger orders to single customers. Mass production.

As for my own personal concerns, the only one I have is cash. You must have enough cash on hand to bridge costs. With the warrants exercised, it'll be interesting to see how these cash positions stand. So long as they keep increasing their borrowing base, they can always lever that through wells fargo, and grow some more, in the most difficult market in decades..

This company has a LONG history of dilution and destruction of shareholder capital, as I'm sure you've witnessed, but Oil and Gas entry into the sales picture changed this from a watchlist stock to a stock that I actually own now.

I have roughly 60k now at 1.07 PPS. I feel the risk/reward is not as extreme as passing glances might think.

The market is in 'show me' mode though.

So we will see...
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