Shares of Capstone Turbine (CPST) reacted positively last week to news that the company had reached a deal with General Electric (GE) to extend its OEM agreement for GE's Heat Recovery Solutions segment Clean Cycle generators through January, 2016. With the deal, GE also agreed to provide continued parts support to Capstone through 2020, freeing up Capstone to sign longer-term m service agreements with its distributors and customers.
Before shares retreated back to the dollar level later in the week, CPST touched $1.13 on the news, and increased volume threatened to move the price higher before shares closed Friday at $1.06.
The Capstone/GE collaboration is important for a few reasons, and brings to light some potential scenarios that could alter the landscape of Capstone as an investment.
Most notably, by combining the technologies of the two companies, qualifying customers in California are able to receive a rebate to help reduce the cost of installing Capstone's waste heat applications; an attractive incentive for existing customers to stick with Capstone and for potential customer to jump on board.
Maybe more importantly, however, the collaboration reinforces speculation that there could be more in store for the relationship between these two companies than just a parts and OEM agreement. Quarter after quarter Capstone demonstrates that it is on an aggressive path towards profitability, and although it's been speculated for a while that the company could become a buyout target for GE, the situation may be more ripe now than ever to see such a move happen, especially given the announcement of the agreement extension.
Capstone is already gaining influence around the globe as a clean energy provider, and the company was deemed worthy of mention by US President Barak Obama during a speech in Brazil earlier this year. The last piece to the puzzle may be convincing evidence that Capstone could turn into a profitable business, hence GE electing to extend its existing relationship to let the scenario unfold.
Regardless of whether a deal eventually goes through or not, the collaboration helps to validate the future of Capstone and its microturbines.
Brad Garner, President of heat recovery solutions for GE's Gas Engines business noted in last week's press release that, "GE Energy's collaboration with Capstone underscores the reality that there is no one 'magic bullet' that will solve all of the country's energy and environmental challenges. Having the ability to offer GE's Clean Cycle heat recovery solution in addition to Capstone's microturbine technology showcases how different distributed energy applications can be leveraged in innovative ways to help California achieve its renewable energy production and efficiency goals."
It's worth keeping an eye on the relationship between these two companies, as GE is recovering nicely after having been held down by the troubles of GE Capital since the economic collapse of 2008 and could be looking to boost its leverage in the clean energy sector.
Likewise for Capstone, shares touched over the two dollar mark following President Obama's comments in Brazil, but heavy short interest has battered the stock back down to the more attractive buying range of a buck.
While GE garners the buyout speculation due to last week's announcement, other big players in the sector - such as Cummings (CMI) or Caterpillar (CAT) could also be considered potential buyers.
With the positives experienced by Capstone in 2011 in terms of revenue growth and high-profile media attention, 2012 could turn into a year of sustained share price increases - especially if collaboration with bigger players continues to gain headlines.
Disclosure: Long CPST.