24/7 Wall St.

Capstone Turbine Corp. (NASDAQ: CPST) is one of the holdover clean energy stocks that saw great interest during the clean energy boom, followed by some serious tempering of expectations. This is a company that still has a future, and its energy is something we consider to be less dirty rather than truly green. That being said, one Wall Street analyst has taken a very positive view and sees substantial upside from here.

We have inquired about a research upgrade from Cowen & Co., which initiated Capstone Turbine with an Outperform rating and with a $1.90 price target. If the firm ends up being accurate, this is representative of almost 70% in upside from Capstone’s closing price of $1.12 on Thursday. Capstone’s market cap is about $350 million, and its 52-week trading range is $0.73 to $1.52

Capstone Turbine is leading in microturbine technology solutions for use in stationary distributed power generation applications. Its turbines are believed to be among some of the best solutions, but admittedly that depends on who is opining. The company has a few analysts that cover the stock, but the range of estimates is rather wide. Sales are expected to be just over $149 million for the current year and almost $187 million next year, and the next fiscal year is expected to come with a tiny profit.

When Capstone reported earnings in August, the company posted its third straight quarter of double-digit gross margins. Unfortunately it was also a disappointing quarter for sales. This was blamed on a timing issue with regard to collections and shipments rather than systemic business issues. Capstone also reported that it was seeing a record in product backlog of $155.8 million, which is more than a year’s worth of full expected sales if the analyst estimates come true.

UPDATED at 11:30 a.m.: 24/7 Wall St. has received an updated message confirming the $1.90 price target and Outperform rating from the firm’s Robert Stone and James Medvedeff, and some details of the call are as follows.

The report calls Capstone the global volume leader in microturbines and believes that penetration should be aided by fuel flexibility and energy efficiency. Oil and gas is the largest near-term market, with fiscal 2013 having reached a double-digit gross margin. The firm is modeling positive EBITDA in fiscal 2015 (next year) and a mid-teens operating margin by fiscal 2017. Distributed generation and transportation markets total $14.7 billion, and the potential penetration for Capstone should be about 10% ($1.5 billion).

The report also said:

We project a 5-year revenue CAGR of 23%, from $128MM in F13 to $365MM in F18E. GM should expand from 11.3% to about 35% on higher utilization, cost reduction and lower warranty and royalty expense. We model operating expense growth of 9% per year; operating margin should turn positive in F15E, and reach 16% by F17E. Thanks to a low tax rate and minimal capex, FCF should grow substantially from F15E, and the model should yield high ROICs (45-55% in F17-18E) once scale is achieved.