Hudson Technologies (HDSN) shares had a tough day, falling 9% despite reporting much better-than-expected results in the fourth quarter of 2022. Specifically, the company reported fourth-quarter earnings of $47.4 million and earnings of 11 cents per share. This comfortably exceeded analyst estimates of $37.4 million and 7 cents as sales prices and volumes of certain refrigerants were higher than expected. But given how strong the top line was compared to expectations, we think investors were disappointed that the bottom line didn’t beat better. was well below the 40% or more alluded to by management on its third quarter earnings call in November, reflecting the fact that it fell short of its long-term target of 35%.

This suggests that the gap between inventory costs and selling prices narrowed somewhat sooner than expected, but Q4 is outside the nine-month sales season from January to September, so the seasonal I think it’s important to remember that it’s HDSN’s weakest quarter overall. Therefore, sales and gross margins are typically much lower than those achieved during the sales season. Therefore, even a modest acceleration in refrigerant price easing could have a very large impact on profit margins over the period. I think that’s why we’re confident the company can bounce back from this low and achieve normalized baseline gross margins of at least 35% this year and beyond.

More importantly, even assuming no top-line growth in 2023, even if HDSN currently forecasts a much higher effective tax rate of 26% (with a higher tax rate realized in 2022, That means earnings per share this year isn’t far from the $1.21 that analysts were looking for at this target gross margin run rate (compared to a low 11%). Moreover, if HFC production and consumption levels under the AIM Act were to be lowered next step to 60% of the planned baseline level in 2024 (from the current 90%), the price of refrigerants and HDSN would increase significantly. Demand for high-margin recycled refrigerants should likewise decline. The more than 125 million stationary units that the company estimates still use HFCs continue to grow as they begin looking for alternatives. In addition to my expectation that gross margin will decline more slowly from last year’s record 50% to target of 35% to target of 35% rather than immediately, I think it has the potential to outperform significantly.

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And let’s not forget, starting with the AIM Act slashing HFC production by just 10% to 90% in 2022 and requiring no additional step-downs in 2023, the future performance of HDSNs will be impacted. The real driver is this additional 30% phasing down followed by further reductions of 30% in 2029, 10% in 2034 and 5% in 2036 for a total of 85% production over this span level is reduced. As this situation continues, I believe HDSN remains well-positioned to meet the previously stated goal of achieving annual revenue of over $400 million by 2025. increase. $1.50 per share by then. However, today’s unjustifiable sell-off in stock prices has caused even the lowered earnings forecast of $1.19 per share in 2023 to trade at an incredibly low price of 7.2x, making this strong forecast performance much more likely. I think there will be quite a movement to reflect and move back to a significantly higher level. as soon as you can.

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