Microcap Stock Analysis: Hudson Technologies

Depending on whether you’re Team Al Gore or you believe global warming was created by the Chinese to promote manufacturing like Trump, you may or may agree to this report on Hudson Technologies (NASDAQ:HDSN) (“HT”).

HT is in the business of refrigerants, the chemical used in cooling like in air conditioners and refrigerators. The company provides new, reclaims old, and recycles refrigerants. HT passed the initial screening so am taking a closer look. Let’s see what we can find…

While doing preliminary research on Hudson Technologies, my key initial questions specific to this company are:

  • Environmental issues?
  • Trend of refrigerants?
  • Face any regulation challenges to reduce emissions that could affect refrigerants?
  • Did the business innovate/change over time?
  • How many refrigerant companies are out there as targets?
  • How helpful is their energy optimization?
  • How many certified reclaimers are there?
    • HT has 35% of market share in reclaim refrigerants
  • Uhhh

Wait, hold on.

Went into the financials. Yikes.

Three-months ending March 31, 2018 was abysmal. Problems:

  • Excluding the revenue from the acquisition of ARI, organic revenue decreased by $17.5 million YoY, mainly because of a decrease in the selling price per pound of certain refrigerants sold, which accounted for $8.5 million decrease and another $10.3 million decrease was due to a decrease in the number of pounds of certain refrigerants sold, which was due to colder temperature.
  • Cost of sales did not decrease in proportion to a decrease in selling price, which resulted in a significant loss in the quarter.
  • They have $100 million of debt on their books due to the acquisition of ARI.
  • ARI only contributed $3.6 million of revenue in the first quarter, which is not doing much.
  • Their operating cost was off the charts.

So, my friends, my analysis of HT ends here. The company’s financial position is way too risky. The acquisition of ARI did not prove to be synergistic. They have to sort out the transition with ARI. And let’s face it, they’re holding on for dear life in a dying industry – classic example of consolidations in a declining industry until last man standing.

Overall, there are too many uncertainties from external factors that affect the company’s performance.

I do believe that the refrigerant industry isn’t going to die off in the seeable future. Until there is a mass introduction and adoption of cooling air with renewable energy without refrigerants, air conditioners and refrigerators are going to exist.

The story doesn’t end here though. I’m going to bookmark HT until their next set of financials that shows an improvement in their operating cost and their debt position; i.e. that they are deleveraging and meeting their covenants. The summer months ahead isn’t going to be a good indicator since their sales will increase naturally due to hot weather anyway, but there might still be some positive changes the management proves such as negotiated decrease in cost of sales, etc.

Too bad, I had high hopes for this company.

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