Hudson Technologies (HDSN) Stock Analysis

Investment Thesis

After analyzing Hudson Technologies and its most recent SEC filings I would not invest in the stock due to the high degree of uncertainty leading up to its reporting deadline of November 21st. The stock’s degree of risk is too great for my tolerance, however, if one bets on positive earnings reports on November 21st and is correct there is significant upside.

What is Hudson Technologies?

Hudson Technologies (HDSN) is a refrigerants retail and services company headquartered in Pearl River, New York. Hudson sells various refrigerants, provides on-site services, and is the world’s largest refrigerant reclaimer. By reclaiming refrigerants Hudson is able to reuse and reduce the amount of new refrigerant production that negatively affects the environment. Hudson features a strong management team, led by CEO Kevin Zugibe. Zugibe founded the company in 1991 and his experience is a positive sign for the company. COO Brian Coleman also has valuable experience at Hudson as he has been with the company since 2001.

Current Situation

During the second quarter Hudson Technologies fell below their loan covenants due to losses and inventory write-offs. These occurrences technically put them into default on their loan. By printing their financials for quarter’s two and three they would be confirming their default and this would be extremely detrimental to the company.

In an 8-K released on August 8th, Hudson reported revenues of $58.1 million for the quarter. This represents an 11% increase from the second quarter in 2017. However, the company also reported $32 million in inventory write-offs during the quarter due to a decline in selling price of Hudson’s products. These significant inventory write-offs were a massive blow to the company’s first half of 2018 earnings which were announced as a loss of $31.6 million. This loss is what would take Hudson below its loan covenant if formally reported in a 10-Q.

In this same 8-K, CEO Kevin Zugibe commented on the state of the company. When discussing the disappointing quarter, he claimed that the “business continued to be impacted by the challenging pricing environment affecting the industry and the market from the start of the 2018 selling season.” This is a concerning reason for Hudson’s extremely poor performance. Other refrigerant companies such as Comfort Systems USA, Inc. (FIX) with YTD stock price growth of 36% and Ingersoll-Rand Plc (IR) with a YTD stock price growth of 14%, were able to overcome the pricing issues of the first half of 2018 and succeed. This makes me think that there are other factors affecting Hudson’s inability to turn its inventory into profits.

Due to the very poor second quarter for Hudson they decided not to release a 10-Q as it would prove their losses. Hudson instead decided to request an amendment to their current loan that would allow for them to report the losses of the second quarter while preventing a default on the loan. Hudson is traded on NASDAQ and this refusal to release an official earnings report for the second quarter forced the stock exchange to enact a deadline of October 15th for Hudson to report on its quarterly performance. On October 16th, Hudson released another 8-K announcing that they were unable to report their earnings for Q2 and Q3 by the NASDAQ enforced deadline and that they have requested yet another extension from the exchange. This news leads me to believe that Hudson is still struggling to reach an agreeable amendment to their loan term with the loan agency and that they are still far from reaching a level of net income that is in line with the covenants of the loan.

On October 24th, it was announced that the NASDAQ had accepted Hudson’s plea for yet another extension and that the company has until November 21st to report its earnings for the second and third quarters. If this deadline is not met by Hudson, NASDAQ will delist the stock from the exchange. At this point, Hudson may appeal the decision to a hearings panel for review.

Deadline Expectations 

The November 21st deadline will represent a make or break point for Hudson Technologies. If they report earnings for quarters two and three we can expect that the Q3 income statement may look a lot like the one from Q2 due to the significant delay in reporting. This delay represents fear in an inability to satisfy the loan agency. This tells me that Hudson was unable to improve its net income from the losses that it unofficially reported in its Q2 8-K. By reporting further losses, the company will officially default on its loan and a significant drop in stock price will occur. Seeing that the current stock price is $1.23, this event would make the stock essentially worthless.

Another possible scenario is that Hudson reports significant improvement in Q3. This improvement surprises investors and the stock increases significantly. This is possible because during the first half of 2018 Hudson was able to generate $8.6 million in positive operating cash flow and pay down approximately $10.6 million of debt. The company believes that although the reduction in inventory hurt their standing with the loan agency it, along with a one-time tax benefit related to the recent tax law changes could lead to a 2018 total free cash flow of $30 million. This proves that the company does have potential for a positive earnings report on November 21st.

There is also a chance that Hudson is able to reach an agreement with the loan agency that allows the company to report its significant Q2 losses without defaulting on its loan. This result would be positive as they would be able to direct their attention moving forward to generating incoming cash flows as opposed to constantly hiding info from the loan agency in fear of an extremely detrimental default.

The final, and what I feel is the most unlikely result, is that Hudson does not report its Q2 and Q3 earnings by November 21st. This would lead to a delisting from NASDAQ and a lengthy appeal process. This would significantly hurt the value of the stock and its trading volume.

Industry Outlook 

Oil is currently at an annual low but its overall three-year trend indicates that its price will continue to increase. This increase in energy costs is expected to encourage supermarkets, restaurants, hotels and other market customers to upgrade and replace their existing refrigeration units. Increased consumer spending will continue to benefit the customers of the refrigeration industry and this will lead to more cash available to upgrade their refrigerants. This should lead to upward growth for the refrigerant retail, services, and reclaiming industry moving forward.

Conclusion

HDSN is a stock that appears to be a gamble moving forward. By the time November 21st passes the company’s outlook will be much clearer. However, waiting until after November 21st could lead to a miss of Hudson’s growth opportunity in the case that it reports surprisingly positive earnings. However, I anticipate that if Hudson reports their Q2 and Q3 earnings by November 21st they will not include a significant improvement in net income. The company’s refusal to disclose any information regarding Q3 even in the form of an 8-K makes me feel that they are not proud of the results and fear for how the information will be received by the market. For this reason, I am not investing in HDSN at this time and I will instead observe how it performs upon the November 21st deadline from the sideline. Once this deadline has passed I will reassess the reported financials of the company and if I see improvement from Q2 to Q3 I may be influenced to invest in an extremely cheap stock that has been significantly devalued in the last 9 months.

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