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Hydrogenics leads the charge in fuel cells

A Hydrogenics production line is seen in this file photo. The company may be in the black by the fourth quarter.

Investors are stepping back into the volatile hydrogen and fuel-cell sector, lured by the technology's growing commercial credibility and the promise of near-term profit.

One stock gaining attention lately is Mississauga-based Hydrogenics Corp., which analysts expect to be one of the first in the sector's current incarnation to report earnings in the black, perhaps as early as the fourth quarter.

"You don't even have to stand on your toes any more to see the profitability in the future," said Theodore O'Neill of Ascendiant Capital Markets. "The business is finally working."

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Hydrogenics makes hydrogen-generation products and fuel cells that convert hydrogen and oxygen into electricity. What sets the company apart from its larger industry rivals is its power-to-gas technology, which stores renewable energy.

The company was recently awarded what it calls a "first of its kind" power-to-gas project in North America with Ontario's grid operator in partnership with Enbridge Inc., which is also Hydrogenics' second-largest shareholder with a 5-per-cent stake.

That project was announced just weeks after Hydrogenics signed a promising joint venture with South Korea's Kolon Water and Energy to help them build renewable power generation projects in that country.

"They have multiple irons in the fire and all of them are in their infancies of growth," said Jennings Capital analyst Dev Bhangui, who has a "buy" on the stock and recently increased his target to $26 (U.S.) from $22.

The shares are currently trading around $23 on the Nasdaq, down from a 52-week high of $35.52 in March. Although nowhere near their high-flying levels at the start of the century, fuel-cell stocks rallied earlier this year, driven by big orders and stronger revenue reported across the industry.

The sector has since pulled back, but investors in Hydrogenics and larger players such as Ballard Power Systems Inc. and FuelCell Energy Inc. have seen their stocks double in the past year. Plug Power Inc. shares have performed the best, soaring more than 1,000 per cent over the past 12 months.

The stocks remain a risky play. Still, all five analysts that cover Hydrogenics recommend it as a "buy," with an average price target over the next year of $30.

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Analysts say Hydrogenics is poised to benefit from utilities looking for renewable energy storage to protect their customers from power outages.

The company's backup-power business is also expected to grow, especially as its strategic investor and largest shareholder, wireless infrastructure company CommScope Holding Co. Inc., moves aggressively into the data centre backup-power business. CommScope owns 17 per cent of the company's shares.

"We expect this business to be large; it is currently in the nascent stages," Mr. Bhangui said.

He also points to its growing backlog, which is a gauge of future sales.

Hydrogenics reported a backlog of $67.1-million as of June 30, up 15 per cent from the first quarter ended March 31. Management says it has "visibility on a number of sizeable opportunities," that could increase its backlog to more than $100-million in the next 12 months.

"Hydrogenics is at the early stages of a large, open-ended growth ramp," Craig-Hallum Capital Group analyst Eric Stine said in a recent note, reiterating his $32 target.

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Canaccord Genuity analyst Sara Elford has a $32 target on Hydrogenics, citing in a note its power-to-gas technology as a "key differentiator" and its "transition to profitability."

Hydrogenics said it expects to report positive adjusted earnings before interest, taxes, and depreciation for the year and revenue of more than $50-million, up from $42.4-million in 2013.

"Our key target that we are pursuing is to lead the industry and be profitable this year," Hydrogenics chief executive Daryl Wilson told investors in a conference call on July 30.

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About the Author

Brenda Bouw is a freelance writer and editor based in Vancouver. She has more than 20 years of experience as a business reporter, including at The Globe and Mail, The Canadian Press, the Financial Post and was executive producer at BNN (formerly ROBTv). Brenda was also part of the Globe and Mail reporting team that won the 2010 National Newspaper Award for business journalism. More


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