Hyrdogenics (Nasdaq:HYGS) Has Gotten Cheap Again - We Are Bullish on it At Current Levels

Sep 17, 2008
Author: SCP Editor

September 17, 2008 – We spent the past couple days at Merriman Curhan Ford’s Investor Summit in San Francisco and had an opportunity to sit in on several presentations for companies that we have been following here at the Small Cap Pulse, including Hydrogenics (Nasdaq:HYGS), and Quantum Fuel Systems Technologies (Nasdaq:QTWW). Both gave exceptional presentations and reinforced our conviction that, at $0.68 and $1.31, respectively (yesterday’s closing prices), these are tremendously attractive stocks to own based on growth opportunities in hydrogen fuel cell storage and in the hybrid and PHEV markets.

Here is our recap:

Hydrogenics (Nasdaq:HYGS) – Trends that will drive Hydrogenics’ business include increasing global electricity demand, rising fossil fuel costs, need for storage solutions (up to utility scale) for renewable energy, and climate change related factors. Management pointed out that in addition to these rising trends, costs are decreasing for fuel cells, durability has increased, and the technology is being accepted in the mainstream. Time and again, we hear that energy storage is a critical issue for the acceptance and adoption of renewable energies (wind, solar, electrical grid and hydro). Hydrogen fuel cells are definitely a cleaner alternative than conventional sources and are growing increasingly competitive with them.

Improving business economics:

·         First half revenue growth of 63% (’07 to ’08)
·         First half loss decreased by approximately 29% (’07 to ’08)
·         New market engagement strategy with initial orders and a strong sales funnel for hydrogen energy storage projects
·         Fuel cell activities focused toward early adopting markets complimentary to energy storage systems

Hydrogenics’ go-to-market strategy involves initially targeting the remote community power market where existing hydrogen fuel storage applications are viable (less than 5MW), and in the future, as hydrogen fuel storage scales to address 10MW+ facilities, to go after the utility-scale market. Hydrogen fuel storage is an increasingly attractive alternative to diesel storage systems as diesel prices trend higher. This is even more the case in remote communities which transport costs are factored in. As it stands today, diesel fuel is the primary source of electricity in several thousand remote communities.

Target markets

·         Onsite generation - $100 million market today, expected to reach $250 million by 2010
·         Backup power for telecom - $1.9 billion market
·         Backup power for data centers - $1.3 billion market

Note that recent power outages caused by catastrophic events such as Katrina created an urgency for extended run backup power systems.

·         Enhanced operating efficiency for forklifts

In addition, in the wind and hydro markets where there are cost and storage issues associated with intermittent/renewable energy generation hydrogen fuel cells are a compelling alternative to conventional diesel systems from both a cost and environmental impact perspective. There is more than 3.8GW of installed solar and 94GW of wind capacity currently installed and Hydrogenics should benefit from its ability to turn intermittent/off-peak power into base-load power.

After we first mentioned Hydrogenics on May 14, at $0.73, the stock ran to about $2.50 and has since, pulled all the way back to $0.68 (yesterday’s closing price). Since that time, the fundamentals have only continued to strengthen. On the other hand, the broader markets have been rattled, creating broad-based weakness for stocks. So it is reasonable, in our opinion to recalibrate our expectations of Hydrogenics based on the current macroeconomic backdrop.

We are forecasting $40 million in revenues for FY2008, and think that, given the company’s tremendous growth opportunity and proven ability to address it, that a 2.5x P/S multiple is defensible, which produces an implied stock price target of $1.08, a 58% increase from yesterday’s closing price.

Important Disclosure Note: SCPEditor is LONG HYGS. The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance.