| 2023 | 2024 | ||||||
| Price: | 8.94 | EPS | 1.51 | 1.69 | |||
| Shares Out. (in M): | 47 | P/E | 5.9x | 5.3x | |||
| Market Cap (in $M): | 422 | P/FCF | 12.9x | 12.5x | |||
| Net Debt (in $M): | 31 | EBIT | 93 | 102 | |||
| TEV (in $M): | 454 | TEV/EBIT | 4.9x | 4.5x | |||
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Summary
Hudson Technologies, Inc. (“HDSN”) distributes, reclaims, and provides services for refrigerants. HDSN has a market cap of $422M (47M+ shares at ~$9/share), net debt of $31M, and trades at nearly 5x 2023P Adj. EBITDA of $98M. As the largest player in the reclamation market, HDSN has benefitted from green regulation that mandates production/importation of certain newly produced (“virgin”) refrigerants to be stepped down over time; this has driven demand and prices for renewed/reused (“reclaimed”) versions of these refrigerants. Among some reclaimed refrigerants (“RRs”) subject to phaseout, prices have 30x’ed. The RR market’s biggest near-term milestone is virgin HFCs’/R-410A’s next mandated step-down: 40% cumulative from 2020 baseline in 2024. As is true for all commodity-driven markets, prices for RRs can be volatile; however, for RRs specifically, the expectation is that prices trend upward and have a long tail before reaching obsolescence, benefiting reclaimed HFCs/R-410A through the course of its step-down (85% cumulative by 2036). Lack of disclosure on HDSN’s RR volume and revenue mixes, as well as pricing volatility, prevents me from placing a high degree of confidence on any specific near-term outcome. For that reason, I relegate HDSN to a risky, secular bet, but with significant upside potential for investors willing to hold through volatility. Still, I value near-term HDSN shares at $13.50+, or ~55% upside to its current share price (~35% upside discounted back to today), by applying a 6.0x adj. EBITDA multiple to 2024P adj. EBITDA of $107M ($359M revenue; 36.5% GM). Sensitizing these drivers yielded near-term targets of <$22.50 (~150% upside) on the high end and <$4.00 (~60% downside) on the low end.
Business Overview
HDSN distributes, reclaims, and provides services for virgin and RRs to 7K+ customers in the US. Refrigerants are compounds that lie within residential and commercial A/C, industrial processing, and refrigeration systems. These systems compress, condense, expand, and evaporate the refrigerant in a continuous cycle, which allows them to vacillate between low-pressure gas and high-pressure liquid, transferring heat and cooling the surroundings. HDSN focuses on reclamation, in which refrigerant is safely removed and stored in cylinders for decontamination and reuse at a certified facility (or environmentally-responsible disposal). A system’s size, usage patterns, age, and guidelines set by OEMs or regulatory bodies dictates the intervals for maintenance checks (e.g., OEMs typically recommend annual checks for residential systems, quarterly/biannually for commercial/industrial systems), which help identify leaks and other inefficiencies that might require reclamation. Ultimately, reclamation helps restore systems to efficient operation, avoiding costly system breakdowns and replacements and extending their useful lives, which are typically 15-20 years at installation.
Summary of HDSN’s offerings:
HDSN’s business is seasonal with Q1-Q3 selling seasons contributing ~85% of annual revenue and Q4 winter months contributing the remainder. Customers use an eCommerce platform and/or place purchase orders (i.e., no backlog / deferred revenue) with salespeople who receive base + commission. Commissions are higher for RR (~50% GMs) vs. virgin refrigerant (~20% GMs). Larger customers have standardized pricing agreements for specific offerings.
Situation Overview
Secular trends
The reclamation market has grown significantly in recent years given (1) regulatory and (2) macro secular trends. While macro trends have helped modestly grow RR volume (~5.5% CAGR), TAM growth is mostly attributable to regulatorily-required supply constraint of virgin refrigerant, increasing the demand pricing for RRs.
(1) Regulatory drivers: Over the years, federal and state government bodies have implemented safety and sustainability initiatives via treaties, laws, and regulations — the Montreal Protocol / Kigali Amendment, the Clean Air and Water Acts empowering the EPA for rule-making/oversight, the American Innovation and Manufacturing Act of 2020 (“AIM”), OSHA, California Air Resources Board, etc. — that have guided, limited, or prohibited altogether the production, importation, and/or consumption of refrigerants. For example, the phaseout of virgin CFCs (e.g., R-12) and HCFCs (e.g., R-22) in the 1990-2010s saw prices of RRs for these compounds 30x from ~$1/lb. to $30/lb. HFCs (e.g., R-410A) are now undergoing a similar phaseout — under AIM, the EPA set rules requiring production and importation of virgin HFCs to step-down by 10% from baseline in 2022, 40% from baseline in 2024, and subsequent step-downs to reach 85% cessation by 2036. The 10% step-down caused reclaimed HFC/R-410A prices to rise from LSD-MSD/lb. to $10/lb.+ today, and some speculate that the impending 40% step-down could catalyze further price increases, replicating the pricing curves of reclaimed CFCs and HCFCs. Effectively, HDSN investors are speculating on a similar move for HFCs.
(2) Macro drivers: Population growth coupled with infrastructure development/improvement has grown the refrigerant market substantially. For the commercial market, HDSN estimates HVAC infrastructure grows at 5-10%/year, while in the residential market, the EIA estimates two-thirds of US households have central A/C, up from ~54% 20 years ago (88% up from 77% for all A/C in the same timeframe). These secular trends bode well for refrigerant volumes overall, including the reclamation market. Commodity dynamics provides less clarity on sizing reclamation going forward given several important factors, such as (1) understanding/projecting the mix of existing refrigerants that might be deployed in new builds — virgin or reclaimed HFCs vs. virgin HFOs (cleaner and less regulated, thus no market for reclamation jut yet) vs. other, (2) innovation, obsolescence, and their impacts on prices and volumes, and (3) future regulatory action.
Competition
HDSN is the largest reclaimer with ~35% market share (self-reported) — they were previously the largest player with ~20% market share until they acquired the reported #2 player (~15% market share), Airgas Refrigerants (“ARI,” rebranded “Aspen”), in October 2017 for ~$220M, or ~1.5x LTM revenue ($209M at close). A-Gas International and National Refrigeration are HDSN’s larger competitors, estimated at ~15% market share each, within a fragmented market of other reclamation product and service providers. The AHRI 700 standard to HDSN delivers RR is shared by a narrower group of ~65 peers (one of which is Aspen) on the EPA-Certified Refrigerant Reclaimers list (as required by Section 608).
Recent Performance
While earnings provide a look-through to some idiosyncratic decision-making and operating performance, HDSN performance, and its share price alike, moves with refrigerant pricing. Operationally, HDSN has experienced some of these effects (see below) and, over this time, shares have bounced mostly between $8-10 ($6.62 low, $12.46 high).
Valuation
Multiples
Benchmarking vs. peers is difficult given HDSN’s direct competitors are all private. Defining a broader public peer group shows HDSN with a long-standing valuation discount, where post-COVID HDSN has traded as low as 3.5x forward EBITDA and upwards of a low-teens multiple; in that time, peers have typically traded in the mid-teens forward EBITDA. (See HDSN Backup for list of peers.). Today, HDSN trades at ~5x vs. peers in the low-teens.
Sensitized Cases
The ability to project HDSN’s financials is particularly limited, especially given volatility in pricing, which is alluded to above, is discussed further below, and has a monolithic influence on revenue, cash flow, and share price. Sensitizing near-term performance hinges on pricing assumptions and related knock-on effects:
Risks
Distribution, reclamation, and related services for refrigerants, and relatedly, HDSN, is exposed to several risks:
Virgin HFCs’/R-410A’s next mandated step-down: 40% cumulative from 2020 baseline in 2024
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