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Dear Mr. Berko: A good friend, who is a mechanical engineer, just bought 8,000 shares of Capstone Turbine, a company he believes offers the best and cheapest power-generating sources in the country. The stock trades at $1.03 and I鈥檇 like to buy 5,000 shares. What can you tell me about this company? 鈥� S.A., Syracuse, N.Y.

Dear S.A.: Capstone Turbine Corp. (CPST-$0.90) is a highly speculative, $187 million revenue company, homeported in California with sales offices in China, Singapore, England and Mexico. The Capstone people make micro-turbines ranging in configuration from 30 kilowatts to 1 megawatt. The turbines run on low- or high-pressure natural gas, flare gas, diesel, propane, biogas and kerosene.

And one of the company鈥檚 most prominent and successful micro-turbine installations is in your hometown. Syracuse University鈥檚 impressive Green Data Center has 12 Capstone Hybrid UPS micro-turbines providing power to the entire facility. Using at least 50 percent less energy than a comparable system, this one produces electricity, heat and cooling power from a single burn of natural gas. The exhaust heat from the turbines is piped into double-effect absorption chillers, which then cool the data center鈥檚 computers. The same micro-turbines provide heat and cooling for the university鈥檚 nearby office buildings. And the savings over traditional power sources is enormous. Each turbine has only one moving part, no gearbox, no other mechanics and doesn鈥檛 require lubricants. The energy is wonderfully clean, beautifully green and quite affordable.

Capstone鈥檚 turbine design is protected by numerous patents. According to an engineering professor at Syracuse University, the design integrates an aero-based turbine, a magnetic generator, simple-but-sophisticated power electronics and air bearing technology to produce impressive and highly efficient results. Fortunately, some power users are paying attention. In the past decade, revenues have grown from $3 million to more than $110 million. Unfortunately, Capstone never made a profit in that decade and its combined annual losses have exceeded combined revenues by millions of dollars. Fortunately, Capstone has over $45 million in the till, only $14 million in debt and management expects the company to be profitable in its next fiscal year with $190 million in revenues. In the coming few years, Capstone鈥檚 superior design could generate over $500 million in revenues perhaps with some healthy share earnings.

Capstone鈥檚 low-maintenance, easy-to-install, spinning micro-turbines are considered cutting-edge technology. Boston鈥檚 huge South Shore Hospital is installing five of CPST鈥檚 extremely quiet, ultra-low-emission, 200-kilowatt turbines. Capstone鈥檚 installation will provide the 100-year-old Boston hospital with 35 percent of its power needs in a small space measuring 30 feet by 8 feet by 9.5 feet. Using inexpensive natural gas, this installation is expected to reduce South Shore鈥檚 power costs by nearly 50 percent a year. The success of this installation will certainly encourage other hospitals as well as managers of high-rise office towers and government buildings to consider this money-saving technology.

Capstone is a cheap stock that may, and I must emphasize the word 鈥渕ay,鈥� someday not be a cheap stock. It has a real 20-cent book value and 300 million shares outstanding. It鈥檚 also worth noting that the Vanguard Fund owns more than 20 million shares, while BlackRock, Lord Abbett, Northern Trust, State Street and a few other institutions own more than 60 million shares of this 鈥渆l cheapo.鈥� That鈥檚 not unimpressive.

I should warn you, my 10 or 12 cheap stock recommendations over the past 35 years have not done well. And I must tell you, no matter how good Capstone looks, the reason it sells for 90 cents a share is because that is the consensus of the entire investment community. If you can afford to risk $5,000, then I鈥檇 say this could be a good speculation. You also should know that in 2001 quite a few fools paid more than $9 a share for Capstone.

Address your financial questions to Malcolm Berko, c/o The Daily Journal of Commerce, P.O. Box 8303, Largo, FL 33775, or email him at [email protected].

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