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Hudson Technologies: Still Ridiculously Cheap

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Hudson Technologies (NASDAQ:HDSN) is simply a small-cap banal pinch tremendous potential. The banal has surged from $0.69 successful 2021 to $10.50 today, pinch nan anticipation of going overmuch higher. As these opening lines suggest, my outlook for this banal is strongly bullish, and I firmly judge that those who person nan patience to clasp onto nan banal for a fewer years will not regret it.

All signals are favorable, from gross separator to gross growth. The beardown upward momentum of nan past 2 years is not simply a consequence of speculation, but alternatively a clear alteration successful refrigerant regulations - nan assemblage successful which nan institution operates - that could change nan equilibrium of nan full industry. This is not your emblematic penny banal driven by a pump-and-dump scheme, but alternatively a institution pinch coagulated fundamentals poised for takeoff.

About Hudson Technologies

HDSN operates successful nan refrigerants market, some done nan waste of nan merchandise and nan proviso of related services. This assemblage is intimately regulated by nan EPA, which assigns yearly quotas for virgin refrigerant production. It besides certifies companies that are authorized to reclaim utilized refrigerants, process them, and waste them to nan market. Hudson has been granted a accumulation quota for HFC successful 2023, but it is overmuch smaller compared to that of its astir important competitors.

quotas for refrigerant accumulation assigned by EPA successful 2023

Hudson Technologies Investor Presentation

Currently, nan institution operates passim nan United States but has nary beingness successful immoderate different markets. It is tin of providing refrigerants of immoderate type and for immoderate manufacture (data centers, ships, supermarkets, etc.) on pinch each sorts of related services.

However, nan existent spot of Hudson Technologies does not travel from nan accumulation of refrigerants aliases services to businesses. The company's existent trading constituent is its activity successful nan reclaimed refrigerant market, wherever it has a 35% marketplace share. There are respective reasons why this vertical is strategically crucial:

  • Thanks to nan biology sustainability of reclaimed refrigerants, they are incentivized by nan EPA complete nan accumulation aliases importation of virgin HFCs.
  • The profit separator connected income is higher.
  • The institution has extended expertise successful nan retrieval of refrigerants, having carried retired nan first specified cognition much than 30 years ago.

All of this allows Hudson Technologies to thrust nan greenish translator activity successful nan refrigerant manufacture pinch important economical benefits.

Why reclaimed refrigerant is specified a large deal

Refrigerants are products that person a precocious biology impact. The accumulation of conscionable 1 kilogram of R410a refrigerant has nan same biology impact arsenic a car that is near moving for six consecutive months. Additionally, galore refrigerants person a known harmful effect connected nan ozone furniture of nan atmosphere. This is why each merchandise is assigned a GWP (Global Warming Potential) score.

Over nan years, regularisation successful some nan USA and Europe has go progressively stringent to limit nan biology effect of nan industry. Products pinch a little GWP people are favored, and imports and accumulation are besides progressively restricted. Reclaimed refrigerant has virtually zero GWP, eliminating nan costs and compliance issues associated pinch nan disposal of exhausted refrigerants and is not taxable to accumulation quotas. Only EPA-approved companies tin grip this process, and Hudson Technologies' main competitors are:

  • A-Gas

  • Arkema

  • ASPEN Refrigerants

  • Benoist Brothers Supply Company

  • Certified Refrigerant Services, Inc.

  • Chemours

  • Golden Refrigerant

  • HARDI

  • Rapid Recovery

  • Refrigerants, Inc

  • USA Refrigerants

market stock of HDSH successful reclaimed refrigerants

Hudson Technologies Investor Presentation

Hudson is simply a leader successful reclaimed refrigerant, doubling nan marketplace stock of nan closest competitor. Additionally, nan institution claims to person higher margins, adjacent to 50%, compared to 20% for virgin refrigerants produced by nan competitors. The expertise to harvester affirmative biology impacts pinch profitability has earned nan institution respective accolades, including nan #5 position successful Forbes' 100 Best Small Companies List for 2023.

Financials astatine a glance

Before analyzing nan business pinch an existent DCF, it is absorbing to cognize nan improvement of Hudson Technologies' results complete nan past 5 years. The awesome alteration successful position of operational profitability is instantly noticeable, arsenic good arsenic nan beardown deleveraging of nan past 2 years.

TTM

Dec 2021

Dec 2020

Dec 2019

Dec 2018

Total Revenues

315.6

192.7

147.6

162.1

166.5

Gross Profit

164.6

71.7

35.4

17.2

-7.4

Operating Income

133.7

42.3

5.9

-15.8

-42.6

EBITDA

139.8

48.5

12

-8.7

-35.5

Net Income

104.9

32.3

-5.2

-25.9

-55.7

Unlevered Free Cash Flow

19.6

-7.4

19

45.6

63

Total Debt

61.9

100.3

93.9

107.1

129.9

Debt/EBITDA

0.44

2.07

7.83

-12.31

-3.66

The company's revenues person astir doubled, while its debt-to-EBITDA ratio has plummeted complete nan past 24 months. This is chiefly owed to a important catalyst: nan 10% simplification of full accumulation quotas for refrigerants by nan EPA for 2022/23.

The existent opportunity, however, lies successful 2024, erstwhile a full simplification of 40% of quotas will beryllium imposed compared to nan baseline. Then again successful 2029, erstwhile accumulation will person to alteration by a further 30% compared to nan baseline.

chart showing EPA virgin refrigerant quotas until 2038

Hudson Technologies Investor Presentation

Note that nan usage of self-financing has been very intelligent. Instead of distributing dividends aliases announcing a buyback of its ain shares, nan institution has continued to put successful its semipermanent business and trim debt. In nan mean word (3-5 years), my wish is that nan institution tin coming itself financially coagulated successful beforehand of investors, truthful arsenic to see going done a superior raising shape to participate nan Canadian and European markets.

DCF Analysis

In nan Q2 2022 quarterly report, nan institution reiterated its optimistic vision and offered investors a clear indication: >$400 cardinal successful gross successful 2025 pinch a gross separator of 35%. This seems for illustration an wholly reliable forecast, and it allows america to build a DCF alternatively straightforwardly.

Here are nan cardinal assumptions:

  • I utilized to conception nan model: I assumed that nan company's projections for 2025 are correct, but I utilized a blimpish estimate of precisely $400 cardinal successful revenue;
  • I assumed that 2023 will spot a YoY gross summation little than 2024, arsenic nan caller trim successful refrigerant accumulation quotas will travel into effect successful 2024;
  • For 2025-27, I assumed a gross maturation complaint of 6%, which is nan estimated CAGR for nan manufacture during this period;
  • In 2028-29, I assumed different jump successful revenue, arsenic nan caller trim successful virgin HCF accumulation quotas will beryllium introduced successful 2029.

The calculated WACC is 9.51%, taking into relationship nan existent risk-free rate, nan banal beta (1.53 connected mean complete nan past 5 years), a 5% consequence premium, and nan existent taxation successful nan authorities of New Jersey.

As for nett income, nan institution is going done a grace play successful position of operating separator fixed its important competitory advantage successful nan world of reclaimed refrigerants. We tin expect nett profit margins to alteration complete clip owed to expanding title from different companies successful nan industry. Additionally, Hudson Tech's taxation complaint will gradually attack that expected for New Jersey companies. For this reason, while nan 2022 equilibrium expanse is expected to adjacent pinch a nett income presumably successful excess of 30% of revenue, I gradually scaled nan nett income down to scope 11% successful 2029.

In ray of each this, present is really nan DCF study looks.

$ millions

2022

2023

2024

2025

2026

2027

2028

2029

REVENUE

310.00

338.00

369.00

400.00

424.00

449.44

476.41

560.00

Net Income

104.00

74.36

66.42

60.00

55.12

53.93

57.17

61.60

Tax rate

32.50%

32.50%

32.50%

32.50%

32.50%

32.50%

32.50%

32.50%

D&A

11.5

12.5

13.7

14.8

15.7

16.6

17.6

20.7

Interest

18.60

20.28

22.14

24.00

25.44

26.97

28.58

33.60

CapEx

2.20

2.54

2.77

3.00

3.18

3.37

3.57

4.20

Unlevered FCF

113.3

84.3

77.3

71.8

67.6

67.2

71.2

78.1

Discounted FCF

113.3

76.99

70.58

65.55

61.74

61.35

65.03

71.32

Continuing pinch nan calculation of terminal worth and nan valuation of nan company:

Present worth (2023-29)

585.8

Terminal value

1346.20

Actualized TV

650.8

Company valuation

1236.7 M$

This valuation implies an upside of 2.59x for HDSN.

Further opportunities and risks

I powerfully uncertainty that nan EPA will reverse its biology policy, though it is imaginable that policies will beryllium revised if nan value of refrigerants becomes excessively precocious for companies further downstream successful nan proviso chain. The aforesaid ambiance schedule regarding refrigerants is besides progressively manifesting itself successful Europe. In nan agelong term, I dream that Hudson Technologies will successfully participate nan EU marketplace earlier its competitors go excessively difficult to scope successful geographic area.

The main consequence of this study concerns nan consequence of competitors, particularly Daikin and Honeywell, to Hudson's existent activity successful nan reclaimed refrigerant sector. On nan 1 hand, location is nan anticipation that 1 of these giants will spot nan added worth of HDSN arsenic an opportunity and determine to get nan company. In this case, shareholders could beryllium rewarded pinch a bully premium connected their shares.

In opposition to this hypothesis, location is besides nan anticipation that a competitor will determine to aggressively compete pinch Hudson by targeting nan world of reclaimed refrigerant pinch much force. I person already taken into relationship successful my study a alteration successful margins connected sales, but it is important that this is not excessively accelerated and excessively drastic.

Final thoughts

Hudson Technologies is simply a institution pinch a agleam future. Like successful nan communicative of David and Goliath, it is challenging nan giants of its assemblage by focusing connected a peculiar marketplace niche that has fortunately been considered truthful important for ambiance alteration that it has ended up astatine nan halfway of nan EPA's refrigerant agenda. Clearly, fixed nan size of Honeywell and Daikin successful particular, a guidance tin beryllium expected.

That said, I judge that nan separator of information is capable to specify HDSN shares arsenic a worth investment. For this reason, I stay patient successful my bullish forecast for HDSN stock, from which I expect astatine slightest a +150% capacity - moreover if existent information were to beryllium little bully than my DCF projections - complete nan adjacent 5 years. Considering nan analyzable macroeconomic script we are presently in, I find an finance that focuses exclusively connected nan fundamentals of a azygous institution moreover much interesting.

This article was written by

Alessandro Calvo floor plan picture

Financial editor since 2016, pinch a attraction connected marketplace cycles and marketplace imbalances. Editor In Chief for TradingOnline.com, 1 of nan astir salient financial news websites successful Italy.

Disclosure: I/we person nary stock, action aliases akin derivative position successful immoderate of nan companies mentioned, and nary plans to initiate immoderate specified positions wrong nan adjacent 72 hours. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga



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