Description
Hi, guys --
I'm going to brief in order to get this in before the market open.
Hudson Technologies distributes and recycles refrigerant gases, with a sideline in refrigerant services. It was ably written up by rii136 2008 and by jak in 2010.
The bulk of the earnings come from sales of R-22, which is being phased out by the EPA because it's ozone depleting. The EPA's plan is to set manufacturing quotas
at 80% of estimated demand, with the other 20% to come from recycling, with the goal of ending production of virgin R-22 by 2020. Historically, recycling has been a
small factor, because the price of R-22 was so low that it wasn't worth it for the contractors to reclaim and return the gas; instead they'd vent it on the site, which
is illegal but undetectable.
I haven't been able to track down the exact reason why, but R-22 prices have gone through the roof over the last few days. Internet scuttlebutt suggests that
manufacturers are scaling back production due to uncertainty about the 2012 allocation, or that the EPA has actually acted to dramatically lower the 2012
limits. (If you look at a chart, the move January move from ~$1.40 to ~$1.80 was in response to the EPA considering cuts of anywhere between 17%-45%
for 2012).
Whatever's going on, the move has been sharp and fast. Here's current pricing from R-22.com:
http://www.r22.org/prod_list.php?sci=3
and courtesy of the wayback machine, here's pricing as of this summer:
http://web.archive.org/web/20101128193729/http://r22.org/prod_list.php?sci=3
So in June you could buy 30-pound containers in bulk (40+) for $160, delivered. Now you can buy 1-5 for $394. Want more than 5 containers? Call.
I don't know if these price increases will stick this time, but if they do they'll have an immediate impact on HDSN's profitability:
1: Instant boost to EPS from FIFO accounting.
2: Turbo-charge the recycling business.
3: If they can maintain gross margins, profitability will go up in the virgin distribution business.
HDSN earned ~$.22 in 2008. Here's R-22 pricing back then:
http://web.archive.org/web/20080717135127/http://www.r22.org/prod_list.php?sci=3
-- a bit higher than this summer. If current prices last, they should be able to do a lot more
than that.
At around 10x last peak earnings with hopes of doing better, I think the stock has immense speculative
appeal.
1: Micro-cap with growing earnings.
2: "Technologies" is in the company name.
3: No comparables to keep a lid on valuation.
4: A great story -- The government wants them to make money!
The R-22 business is going to go away at some point, but well past most "investors" time horizon. A DCF analysis
probably wouldn't support a 15x EPS multiple, but I don't think the market will care.
I'll probably regret submitting this, because I wanted to buy more, but anything for the club!
Yours,
Bowd
Catalyst
Increased R-22 prices.