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Summary

  • Power Systems segment has shown massive growth over the last three years and the difference in revenues for both segments has declined, giving the company a better balance.
  • Focus on the alternative energy sources has allowed the fuel cell sector to grow substantially and Europe is likely to be one of the biggest growth drivers in future.
  • Power Systems segment will likely continue its impressive growth as the market is expected to reach $2-3 billion over the next few years.

Hydrogenics Corporation (NASDAQ:HYGS), together with its subsidiaries, designs, develops and provides hydrogen generation and fuel cell products based on water electrolysis technology and proton exchange membrane [PEM] technology. The fuel cell sector went up with the start of the year and almost all of the players gained substantial value. Hydrogenics' stock also went above $33 in March, gaining over 75% during the period; however, the stock saw a sharp decline over the next month and currently trades just above $19.

Other market players such as Ballard Power Systems (NASDAQ:BLDP) and Plug Power (NASDAQ:PLUG) have also been extremely volatile and the stock prices of these companies have also seen a lot of ups and downs over the last few months. Volatility is normal in the stock price of companies working on revolutionary technologies and the prices usually normalize when the company is able to demonstrate continued growth in revenues.

Business Model

Hydrogenics derives its revenues from two business segments: OnSite Generation, and Power Systems. The OnSite Generation segment, based in Belgium, focuses on hydrogen generation products for renewable energy, industrial and transportation customers, while the Power Systems segment, based in Canada, focuses on fuel cell products for original equipment manufacturers [OEMs], system integrators and end users for stationary applications such as back-up power as well as mobile applications such as forklifts. The OnSite Generation segment proved to be a larger contributor towards the company revenues with $24.1 million in the last year, as compared to Power Systems segment which stood at $18.3 million. However, the Power Systems segment has recorded average annual revenue growth of over 115% over the last three years. On the other hand, revenues for the OnSite Generation segment have shown average annual growth of just 7.4%.

(Millions of US Dollars)

   
 

2013

2012

2011

OnSite Generation

$24.1

$27.5

$19.7

Power Systems

$18.3

$4.3

$4.1

Total

$42.4

$31.8

$23.8

Source: SEC Filings (Form 20-F)

Performance & Growth

Hydrogen is considered to be the most efficient fuel there is in the market. The worldwide market for hydrogen, which includes the merchant gas market for hydrogen, is estimated at $5 billion annually, and is served by industrial gas companies as well as on-site hydrogen generated by products manufactured by companies such as Hydrogenics. The company anticipates the current annual market for on-site hydrogen generation equipment to stand at approximately $100-200 million. The company could benefit a lot from this market opportunity which could grow substantially if the energy storage and electrolysis based hydrogen fueling stations gain widespread acceptance. Based on the constantly increasing demand of the technology, Hydrogenics provides its OnSite Generation products to leading merchant gas companies, such as Air Liquide and Linde Gas, as well as end users who require high purity hydrogen produced on-site for industrial applications. The company also sells its products for progressive oil and gas companies, such as Shell Hydrogen.

The Power Systems business segment of Hydrogenics, based on PEM fuel cell technology, targets several high-margin markets including backup power for telecom and data centre installations and motive power applications, such as buses, trucks and utility vehicles. These Power Systems products, including company's HyPM branded fuel cell products, range from 1 kilowatt to 1 megawatt power solutions. The company estimates a huge growth potential in this segment with an anticipated growth market of $2-3 billion in the U.S. alone.

Moreover, the company recently observed a sharp increase in orders and interest for fueling stations in Europe and other regions, due to which, Hydrogenics maintained an order backlog of $57 million over the last year. The company also managed to add new orders worth $9.5 million to its already impressive order backlog during the first quarter and reported a total backlog of $58.5 million as of March 2014. This increase is mainly due to rising renewable energy demand in the storage, industrial gas and power system applications during the quarter.

(click to enlarge)

Source: Hydrogenics First Quarter 2014 Earnings Release

Future Growth Prospects

The increasing focus on the alternative energy sources will prove to be a major factor for the future growth of the companies operating in the fuel cell sector. Europe proved to be the largest contributor towards alternative and renewable energy storage and generation sources over the last few years. Moreover, the geopolitical conditions regarding Russian-Crimean natural resources also prompted the region to shift their focus from oil and gas towards alternative energy sources. The European Union announced a joint initiative for hydrogen projects worth €1.4 billion ($1.9 billion) in the last year.

The Power Systems segment of the company has recorded average annual growth in revenues of over 115% over the last three years. This segment also includes cell tower and data center backup power market which has estimated market potential of $2 billion, viewed as largest fuel cell end market. The company has developed five products so far which are capable of storing and providing between 2.4-16 kilowatt power output. Hydrogenics has partnered with CommScope, which has laid the foundation for a strategic relationship dedicated to penetrating the large and growing market for telecom, AC and DC backup power systems. Moreover, the company has an impressive lineup of strategic partners including E.ON, a German company, and Enbridge Energy Partners (NYSE:EEP), to further its growth in different segments.

Conclusion

There are considerable growth opportunities in both OnSite Generation and Power Systems segments. The focus on the alternative energy sources is resulting in higher demand for the products of companies such as Hydrogenics and Plug Power. We believe the company is well-positioned to benefit from the growth opportunity and the changing dynamics of the energy industry, and it will prove to be a good investment in the fuel cell sector.

Additional Disclosure: This article is for educational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Is Hydrogenics A Good Investment?