Best stock to invest in – Hydrogenics: New Capital, New Orders



Best stock to invest in

by Debra Fiakas CFA
 
Hydrogen technology developer and fuel cell producer  Hydrogenics, Inc. (HYGS: 

Nasdaq) closed out last year ‘following on’ with new capital and new
fuel cell orders.  The company staged a public sale of its
common stock through what is frequently referred to as a ‘follow on’
offering, coming along as this one did some years after the
company’s initial public offering.  The pricing of these new
shares of common stock was ‘followed’ quite closely by announcement
of a new order for Hydrogenics fuel cells by a forklift manufacturer
in North America.  The appearance of positive fundamental
momentum sparked my interest because it is often the case that
improved valuation sentiment can ‘follow’ a string of good news.

The company took home approximately $17.9 million in new capital
(before expenses) after selling 2.4 million new shares of common
stock at $7.75 per share in mid-December 2015.  Management has
indicated the extra money will be used to support operations while
the company ramps up sales of its proprietary hydrogen fuel cell
technology.  In the twelve months ending September 2015, the
company used $8.6 million in cash to shore up operations.

Hydrogenics was not out of money before the offering.  At the
end of September 2015, the company had $6.9 million in the
bank.  However, at the recent pace in cash usage by operations,
that cash kitty would only have lasted about eight to nine
months.  With proceeds from the stock offering, Hydrogenics has
plenty of runway to get sales up and at least reach break-even
altitude.

Indeed, the order from the forklift customer is encouraging for
achieving break-even.  Valued at $2 million, the order requires
Hydrogenics to deliver fuel cell components to a forklift
manufacturer within the first quarter of 2016.  The components
will be installed in forklifts destined for use in warehouses owned
by a ‘big box retailer’ in North America.  To put the order in
perspective, $2 million represents a 5% increase in sales over the
company’s revenue run rate near $40 million per year.  There is
potential apparently for ‘follow on’ orders (there are those
interesting words again) as the retailer replaces conventional
forklifts with new forklifts powered by hydrogen fuel cells across
its warehouse operations.

If this was the only recent order activity, Hydrogenics situation
might not be as interesting.  In November 2015, the company won
supply agreements from an unspecified number of Chinese electric
vehicle manufacturers for its hydrogen fuel cell and fueling station
solutions.  Hydrogenics did reveal that one of the
relationships is with Yutong, China’s largest bus
manufacturer.  While it is a bit worrisome that the company was
not a bit more forthcoming about how many unique supply agreements
were actually signed, the opportunity clear to penetrate the China
market with a product that fits that country’s transportation and
environmental goals.


Whichever companies have shown interest, the supply agreements
involve fuel cell components for 2,000 vehicles over the next three
to five years.  The new relationships will evolve over time,
with potential revenue near $10 million in the first year. 
There is potential for ‘follow on’ (there we have it again) that
could lead to revenue near $100 million over the next five years.

It is possible the company ended 2015, with over $20 million in the
bank, a nest egg that could support the operations are the current
level of sales and spending for at least another two years. 
With so many sales opportunities for Hydrogenics to ‘follow on’ the
cash might last quite a bit longer.  What is more, Hydrogenics
may have enough cash to pay down some of its debt, which totaled
$12.1 million at the end of September 2015.  Even more
interesting might be a deployment of cash for investments in new
technology or production capacity.

Shares of Hydrogenics have held up since the stock offering a few
weeks ago.  The stock closed the year 2015 at $8.77 on improved
trading volume compared to most of the previous year.  Just the
same the stock price is off highs reached in late November 2015 when
the stock reached a 52-week high of $12.08, making the stock as
interesting as the fundamental developments in the company.

Debra Fiakas is the Managing Director of
Crystal Equity
Research
, an alternative
research resource on small capitalization companies in selected
industries.

Neither the author of the Small Cap
Strategist
web log,
Crystal Equity Research nor its affiliates have a beneficial
interest in the companies mentioned herein.

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