Summary
Core business generates meaningful revenue, and provides a foundation for future growth.
Recently received game-changing orders from Alstom for $50 million and multiple Chinese bus manufacturers for $100 million.
Anticipating follow-on orders each worth $100 million from Kolon, E-ON, and Kurion, as pilot programs with these companies conclude.
Consensus estimates appear to be set very low, paving the way for several quarters of outperfromance, in addition to multiple follow-on orders in the next 12 months.
In 2017, we believe HYGS could generate $100 million in revenue and $0.90 to $1.00 in EPS; Our price target is $18, or 20x 2017 EPS.
Summary
Hydrogenics Corporation (NASDAQ:HYGS) is a manufacturer of hydrogen generation and fuel cell products. Since inception, the company has been producing industrial hydrogen generators, which consistently generate roughly $25 million per year in revenue. This provides a very important base for the company, allowing them to develop several disruptive technologies, including hydrogen fuel cells, Power-to-Gas (P2G) energy storage, and stationary power generation.
The company appears to be approaching an inflection point with several of these technologies, and have accumulated a backlog of $99 million. This accelerating growth, paired with expected follow-on orders and very modest expectations from the street, pave the way for the company to outperform expectations for the next several quarters.
Fuel Cell Buses in China
One of the big contributors to their pollution problem is an aging bus fleet that runs on diesel fuel, and the country's leadership is making a push replace it with zero emission vehicles. The agreements signed by HYGS are worth over $100 million for 2,000 vehicles over five years. The company indicated that they expect over $10 million in 2016, with a meaningful ramp in 2017. This 2,000 bus order represents less than half of a percent of the 500,000 city buses on the road in China, which will all need to be converted from diesel, representing a very significant long-term opportunity.
Alstom Commuter Trains
In May, 2015, HYGS signed a 10 year, 50 million EUR contract with Alstom Transport to provide 200 fuel cell engines for 100 commuter trains. The trains will be used in Germany, which is quickly implementing carbon emission restrictions on all industries, including rail transportation. Using HYGS fuel cell operated trains costs just a fraction of what it would cost to install electric lines over train tracks across the country and install electric trains.
This solution eliminates the need for diesel trains and bring the rail cars into compliance with environmental standards. This contract represents the half of the company's backlog. The company expects $3 to $4 million in revenue in 2016, with a significant ramp in 2017.
Kolon Power Generation
In mid-2014, HYGS formed a joint venture with Kolon Water & Energy to utilize HYGS's power generation technology, which converts industrial waste gases into renewable energy. The initial order of 1MW was commissioned in September, 2015. Upon validation of the 1MW unit, the company expects to install an additional 25 to 50MW, at a cost of $2 million per MW, making this a $50 to $100 million opportunity with Kolon. We expect this deal to be announced in the first quarter, with $20 million of that revenue coming in 2016.
Long-term, this technology represents a much larger opportunity, as global emissions standards are imposed on all industries, and companies world-wide are forced to reduce waste gases. This technology not only eliminates the waste gas, but uses that waste to provide a valuable energy source.
Power to Gas
HYGS's Power to Gas (P2G) technology is a power storage solution that utilizes intermittent renewable energy (solar, wind, etc.) to separate hydrogen gas from water, allowing the gas to be stored or transported, and used to generate energy when needed. As global renewable energy use has increased in recent years, lack of storage has become a problem, because it only generates power when it's sunny or windy. Navigant research estimates that this market will exceed $30 billion by 2022.
HYGS recently commissioned a 1.5MW storage system for German company E. ON, the largest utility in the world. The company anticipates that this is the first installation of many, as their current project pipeline is $80 million, and they anticipate $10 million from E.ON in 2016 alone.
Kurion Water Treatment
Kurion recently purchased an electrolyzer from HYGS for a pilot program to treat and dispose tritiated water in Fukushima, Japan. Despite being almost five years since the nuclear disaster, there are still 800,000 cubic meters of contaminated water awaiting disposal. Reports from this pilot program are due in March of next year, and if successful, represents a $100 to $150 million opportunity for HYGS. While the timing of this opportunity is less certain and more long-term, meaningful revenue in late 2016 or early 2017 is a reasonable expectation.
Fuel Cells for Forklifts
Just this week, HYGS announced a $2 million order from a North American forklift developer. HYGS will provide hydrogen fuel cells for forklifts, which will be sold to a large big-box retailer. This order will be shipped in Q1 2016, with follow- on orders expected before the end of the year. This order represents almost 25% of the $8.2 million in revenue expected by consensus estimates in Q1, suggesting the potential for significant upside to that number. In addition, this has the potential to be the beginning of something big, with this retailer upgrading their entire fleet to hydrogen fuel cells, and the potential for other companies to increase the use of hydrogen powered forklifts in their logistical operations.
Stock Opportunity
HYGS looks like a company at an inflection point, and with fairly modest street expectations, they should consistently beat expectations for the next several quarters. The consensus estimate for 2016 revenue is just $57 million. In addition, the company expects to announce several large orders in the coming months. Based on company projections for several of their new product lines, combined with the revenue from the core business, it appears that the company could easily exceed that number next year. In 2017, we should see an even bigger growth, as the opportunities with Alstom, Kolon, and E.ON start to ramp meaningfully. In 2017, we believe HYGS could generate $100 million of revenue and $0.90 to $1.00 of EPS. Our 12 month price target is $18, or 20x 2017 EPS of $0.90.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
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