Hydrogenics: Stock Severely Oversold - Fundamentals Remain Strong

| About: Hydrogenics Corporation (HYGS)

Summary

HYGS is down 50% since December 1 as oil prices plummet.

None of the company’s initiates are tied to oil, making this an excellent entry point.

Environmental regulations in Europe, and pollution problems in China will continue to drive business, regardless of how low oil goes.

Backlog is $99 million, most of which was booked recently.

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.

Hydrogenics Hydrogenics (NASDAQ:HYGS) is a manufacturer of hydrogen generation and fuel cell products. The company is approaching an inflection point, with a strong backlog and supply agreements in several end markets spanning the globe. Despite the fact that low oil prices have no impact on the future of the company, the stock has dropped with the rest of the energy sector in recent weeks, and is down 50% since early December.

The common misperception with HYGS is that low oil and natural gas prices reduce end market demand for their products. My last article on the company received several comments claiming that very thing. While this may be true of many alternative fuel companies, it is not the case for HYGS.

One of the reasons HYGS won't be impacted by low oil is the amount of contracted sales already in place. The company recently announced an agreement to supply 2,000 buses in China worth $100 million. This agreement was made in November, 2015, when oil prices had already started their free fall. Oil was $40 back then, compared to $30 now, but clearly if oil prices were a factor in making this deal, the Chinese wouldn't have made it. The reason this order was made is because in China, people simply cannot breathe. The country has been run on diesel fuel for so long, that smog has become a significant hindrance to the quality of life. The Chinese government has finally gotten the message from its citizens that it needs to clean up the air, and regardless of how low oil goes, smog in China will continue to be an issue.

A second upcoming catalyst for HYGS is a 50 million EUR contract with Alstom transport in Germany to provide 200 fuel cell engines for 100 commuter trains. This was driven by environmental regulations that have already been implemented in the country. Germany has regulated that no new diesel trains can be installed in the country, and existing diesel trains are being phased out. With diesel off the table, Alstom is left with two options. One is to install HYGS's hydrogen fuel cell trains, and the other is to install electrical lines above every train track in the country. As you can imagine, buying trains from HYGS is a fraction of the cost of installing thousands of miles of electrical lines. Germany has been implementing environmental standards like this for many years, regardless of the price of oil, and there is no reason to believe that will change, especially with the results of the recent global warming summit.

HYGS has several other initiatives in the near future, and none of them are impacts by low oil prices. They will be cleaning contaminated water from the Fukushima power plant nuclear disaster, they give factories the ability to generate power from waste gases, and they just signed a deal to sell hydrogen powered forklifts to a large American retailer. All of these projects will be moving forward this year, no matter where oil prices go.

2016 looks to be an inflection point for the company, with an even bigger ramp in revenue in 2017. We continue to believe that the company can generate $100 million in revenue in 2017, with $0.90 to $1.00 in EPS. Our price target remains in place, with $0.90 of EPS trading at 20x, for an $18 stock price.

Disclosure: I am/we are long HYGS.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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