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Introduction
The share price of Hudson Technologies, Inc. (NASDAQ:HDSN) has experienced a roller coaster ride recently, reaching an all-time high. But in 2020, the stock crashed from $9.17 (all-time high in September 2017), to an all-time low of $0.37 in August 2019, representing a decrease of 96%! HDSN stock is, therefore, suitable only for investors with high risk tolerance.
The question now is whether investors can still find value in HDSN stock after its recent strong rally.
As a result of the American Innovation and Manufacturing (AIM) Act, Hudson Technologies anticipates rapid growth in revenue over the next few years. In addition, the company anticipates a gross margin of 35%, and when factoring in its average historical valuation, there is still room for stock price appreciation.
Company Overview
American Hudson Technologies Inc. provides refrigerant services. Its primary market is the commercial sector, where its products are installed in HVAC, processing, and refrigeration units. Products offered by the firm comprise system decontamination via the RefrigerantSide service, as well as refrigerant and industrial gases, refrigerant management services, and RefrigerantSide services. These are carried out at the customer’s location with the help of its Zugibeast system, a rapid and portable system that allows the R-Side services team to speed up critical services while saving customers time, money, and hassle. Additionally, the facility’s refrigeration systems and other energy systems make use of the company’s real-time monitoring service.
AIM Act Will Boost Revenue
AIM Act Mandates Virgin HFC Phase Down. (Hudson Technologies’ 3Q22 Investor Presentation)
Hudson has long been an industry leader in facilitating and implementing sustainable refrigerant management. The United States Environmental Protection Agency (EPA) is working on sustainable refrigerant management because climate change is a major concern in today’s world.
The EPA is implementing the AIM Act, which grants new authority in three ways:
- To phase down the production and consumption of listed HFCs.
- Manage these HFCs and their substitutes.
- Facilitate the transition to next-generation technologies.
In 2022 and 2023, the AIM Act mandates a 10% cut in virgin HFC production and consumption, with a further 40% cut from the baseline in 2024. In comparison to the R-22 phase-out, which took place a few years ago, the reductions mandated by the Act are much more impactful and rapid. Reduced virgin production boosts demand for recycled refrigerants. Although the transition to using recycled refrigerants won’t happen overnight, it’s anticipated that more than 100 million HFC appliances will be in use around the world by 2020.
The transition to conformity with the AIM Act has begun, with this year marking the beginning of compliance.
Therefore, Hudson is in a prime position to meet the anticipated HFC supply gap with reclaimed refrigerants as virgin production is phased down, as it is the leading reclaimer with the fastest state-of-the-art technology and decades of proprietary knowledge.
The company is also exploring partnership opportunities in response to compliance and issues proposed by some states and the federal government, all of which are related to the AIM Act.
The state of California mandates that original equipment manufacturers (OEMs) use at least 10% reclaimed refrigerant in the factory charged equipment, and Hudson Technologies has been very vocal about this requirement. The use of recycled HFCs is being considered for mandatory regulation in a number of other states as well.
With an estimated 35% market share, Hudson Technologies is in a prime position to supply reclaimed refrigerant to the existing equipment base as virgin HFC production is phased out, and to also become an OEM-level supplier for new equipment. The business has been around for decades and has successfully completed multiple phasedowns of different types of refrigerants. Therefore, the availability of reclaimed HFCs to bridge the reduction in virgin supply is crucial to ensuring a smooth transition to low GWP refrigerants and equipment.
Analysts predict healthy revenue growth in the years ahead. It is anticipated that revenues will rise by 64% from 2022 levels, and EPS will rise to $2.17. By 2025, Hudson Technologies expects to have grossed over $400 million in revenue and maintain a gross margin of around 35 percent. The AIM Act has provided the impetus for this strong growth, which will benefit both investors and end users of reclaimed refrigerant.
Revenue (Hudson Technology’ Seeking Alpha Ticker Page) Earnings Estimate (HDSN Seeking Alpha Ticker Page)
The Stock Is Still Undervalued
The financial results of Hudson Technologies have been a bit volatile over the past few years, with negative free cash flow in 2020 and 2021. In the third quarter of 2022, we are seeing an uptick in sales, with a 48% increase compared to the same period last year. The management is confident in continued rapid expansion.
Hudson Technology Financial Results (SEC and author’s own graphical representation)
HDSN stock’s price to sales ratio is graphed to gain perspective on its valuation. The price to sales ratio is chosen because of the company’s 2025 revenue goal that has been set.
The current price to sales ratio is greater than the three-year average ratio, indicating that the company is trading at a slightly higher valuation.
The 3-year median price to sales ratio was around 1.6 prior to the market crash of 2020. By multiplying Hudson’s 2025 (estimated) revenue by the median P/S ratio of 1.6, we get a market cap of $640M. At the current market cap of $450M, this represents a potential return of 42% over the next three years (at an average annual rate of 12.5%). Despite the recent price rally, HDSN stock is still undervalued.
Conclusion
The share price of Hudson Technologies, Inc. has experienced a roller coaster ride recently, reaching an all-time high. The stock is, therefore, suitable only for investors with high risk tolerance. The transition to using reclaimed refrigerants has begun, and Hudson Technologies is in a prime position to meet the anticipated supply gap as virgin production is phased out.
Hudson Technologies, Inc. is also exploring partnership opportunities in response to compliance and issues proposed by some states and the federal government related to the AIM Act. The AIM Act has provided the impetus for this strong growth, which will benefit both investors and end users of reclaimed refrigerant. By 2025, Hudson Technologies expects to have grossed over $400 million in revenue and maintain a gross margin of around 35 percent. Hudson Technologies, Inc. management is confident in continued rapid expansion. Despite the recent price rally, Hudson Technologies, Inc. stock remains undervalued.
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