Hudson Technologies Inc. (HDSN, Financial) provides solutions to recurring problems within the refrigeration industry, namely in terms of recycling.
While not super exciting and often taken for granted, the company is especially important to comfort within the first-world society. Regardless of how we generate the energy, most people are happy to step inside a grocery or convenience store and grab a cold drink in the air conditioned atmosphere during the hot summer months.
As climate change continues to drive policy, the company is also set to benefit from the new AIM Act, which is supposed to start phasing out harmful hydrofluorocarbons and spur new refrigeration technologies. This is where Hudson can really profit.
Business model
Hudson Technologies offers a variety of products and services within the refrigeration industry. The company sells refrigerants and industrial gases, which are crucial in a wide range of cooling applications.
The company also offers refrigerant management, which involves the reclamation of refrigerants, reusable cylinder refurbishment and hydrostatic testing services. Reclamation of refrigerants is the process of recovering refrigerant gases from discarded or decommissioned cooling units for reuse. Cylinder refurbishment involves maintaining the cylinders that store refrigerants to ensure they are safe and effective for continued use. Hydrostatic testing services are used to test pressure vessels, such as gas cylinders, for strength and leaks.
Hudson’s refrigerant services include system decontamination to remove moisture, oils and other contaminants from refrigeration systems. This is critical to maintain the efficiency and longevity of the systems. Again, this is where the AIM Act could really help boost revenue by reducing production and consumption of HFCs by 80% to 85% by 2047.
On the technology side, the company offer the SmartEnergy OPS service, a web-based real-time continuous monitoring service for facilities' refrigeration systems and other energy systems applications, as well as Chiller Chemistry and Chill Smart services.
The company sells to a wide range of customers, including commercial, industrial and government customers, as well as refrigerant wholesalers, distributors, contractors and refrigeration equipment manufacturers. And last year was the best to date with the company generating $103 million in net profit on $325 million in sales.
Competitive advantages
Hudson Technologies primarily operates as a wholesaler in the refrigerants sector. As a middleman, it bridges the gap between refrigerant manufacturers, such as DuPont (DD, Financial) and Honeywell (HON, Financial), and HVACR manufacturers and technicians who regularly utilize these refrigerants in everyday products. The selection of an appropriate refrigerant product is influenced by a number of factors, including the extent of cooling required and the functionality of the underlying cooling system.
Being a leader in the industry, Hudson Technologies is able to maintain a profitable portfolio of a vast range of refrigerants.
In an air conditioning or refrigeration system, the refrigerant is designed to boil at a low temperature corresponding to the system’s design. Throughout the HVAC refrigeration cycle, the pressure of the refrigerant is manipulated to increase or decrease the temperature so that the refrigerant evaporates or condenses. This changes the state of the refrigerant back and forth between a liquid and a vapor. This back-and-forth change of state throughout the cycle is what transfers heat and provides the desired cooling effect. The refrigerant (also called coolant) is piped between four components - compressor, condenser, meter and evaporator- in a closed-loop system. As the refrigerant circulates, the pressure and state of the refrigerant changes to absorb or release heat. The goal of the regulation is to phase out HFCs currently used by decreasing the production each year.
Maybe we take it all for granted because systems run very smoothly and while that is true, the value refrigeration has to society is immense.
At the core of Hudson's largest advantage is refrigerant recycling. By recycling and reselling old refrigerants, the company is taking revenue from legacy refrigerant manufacturers and further developing economical relationships with key players downstream on the refrigerant supply chain by buying back their old refrigerant and, therefore, creating new refrigerant purchases.
The company has invested millions in the recycling segment, but there are competitors in this space, including Airgas and Chemours (CC, Financial). While Chemours is the only other publicly traded player in the industry, it is not really a threat to Hudson here in the U.S.
Latest quarter
During the first quarter, which ended March 31, Hudson’s financials contracted across the board with revenue down 8% to $77.2 million, net income down from $29.6 million to $15.5 million and gross margins contracting significantly from 54% to 39%. That said, Hudson reduced total outstanding debt to $43.6 million and improved shareholder equity to $191.5 million.
Chairman and CEO Brian Coleman had this to say during the earnings call:
"It's not unusual for us to see pricing pressure in light of volume in the first quarter of any year since during January through March time period, large portions of the country are still facing winter weather and not yet thinking about turning on air conditioning systems.
As we expected, gross margins has begun to moderate as the gap between inventory costs and sale prices narrow. As we've cited on previous calls in 2024 a 40% baseline reduction in Virgin HFCs begins and we believe the aggressive phase down schedule will benefit our business by driving higher demand for our reclaimed refrigerants as Virgin HFCs become constrained.
We are pleased with the start to 2023 and encouraged by our prospects as we enter another selling season. That said, we, like many in our industry, continue to watch the current economic trends. Experience has taught us that comfort cooling and refrigeration can remain more insulated from the worst of a recessionary environment."
The company will have its second-quarter earnings call during the first week of August.
Thoughts on valuation
Hudson has continued to grow regardless of how choppy some of the short-term financial numbers add up. It is well capitalized with solid profit margins during good years. If it can keep gross margins around 35%, it should be able to maintain profitability. With a forward price multiple of just 8 times earnings, the company’s stock looks like a bargain. Could it be a short-term trade on changes in regulation and not a long-term holding? Absolutely. Only time will tell if Hudson can also change with the regulations.
