Hyster-Yale Materials Handling (HY) is not a typical micro cap per se but is under-followed and unfavored by the market; yet it is one of my biggest positions so far. I noticed HY in 2018 when the insiders had some intense buying on the open market. The company has been going through a series of transformations since 2017, and the insiders have been increasing their positions in the past few years. This has aroused my interest to further investigate the reasons behind their move. I've been building up my position gradually with the insiders since last year.
A few quick highlights about HY:
- Market cap $635M with 16.7M shares
- Insiders have increased their position from 18% to 24% in class A shares between 2017 and 2020
- Insiders paid around $50 on the open market
- $0 market valuation for Nuvera, the undiscovered hydrogen fuel cell division within HY (yes, it's given away for free)
- 40% of net income from the other core business is offset by the loss from Nuvera
- P/E is only 10.4 for the core business in lift truck if excluding Nuvera
- Nuvera is anticipated to breakeven in near to medium term with the tailwind from China's clean energy market
HY is known as a full-line lift truck manufacturer that operates its business across the globe. The company has 3 main business divisions, namely, lift truck, Bolzoni and Nuvera, all of which are expected to see some growth in the medium term.
Nuvera - fuel cell business for free
Nuvera is a manufactuer of hydrogen fuel cell systems acquired by HY in late 2014. I was very excited to discover this "hidden asset" within the company, because Nuvera is often ignored by the investment community as the core business in lift truck has taken almost all the attention. However, after years of investments in R&D in hydrogen fuel cells, Nuvera is close to approaching its inflection point to turn breakeven and contribute substantially to the overall business.
No other fuel cell players are profitable; the overall fuel cell industry is experiencing years and years of losses. Unlike all the other fuel cell companies that finance their operations through external fundings via share issuance, Nuvera, however, is fully subsidized from the other profitable core business within HY. This kind of setup provides a sustainable source of funds into the emerging field that is yet to be profitable and prevents a dilution of existing shareholders's interest. The table from their annual presentation shows that over 40% of the net income from the core business is offset by Nuvera's loss.
Not every investment will turn out successful, but I don't believe HY invests so much money year after year on this unprofitable business if this is not going to yield any returns on its investment. Nuvera is among one of the first movers to launch fuel cell productions in China where huge government investment is focused on developing clean energy. Although the break-even target has been delayed due to additional testing and certification required by the local governments in China (breakeven was originally planned in 2H 2019). The production line has been completed in 2019 with shipments expected to ramp up throughout the second half of 2020; the results are expected to improve significantly in the next 3 years.
Because of the investments in the emerging fuel cell market, the company's overall net income is reduced deceivingly on the book. If Nuvera is taken out from the company, HY has $3.64 EPS and is evaluated at a P/E ratio around 10 given the current price of $37.8 (market cap $635M). Not a bad price to pay for a stable mature business with steadily growing revenue AND you get another fuel cell business for free!
To put things into perspective, if you look at the market valuation at other fuel cell players, BLDP, PLUG and FCEL have market cap at $3.85B, $2.76B, and $549M, respectively (none of them are profitable). Nuvera may not be as prominent as the other names, but this promising business with a clear breakeven prospect is still a steal at the valuation of $0. The fact that HY is under-followed by analysts may be the main reason behind the undervaluation. This is a good news for investors like me to obtain a share at a low price, when the market seems to have completely ignored the strategic position the company has built over the years quietly.
Core business that is also improving
The good news doesn't stop at Nuvera - the other two business lines are also expected to improve over time.
The main lift truck business is the foundation of the company. The management team is competent and has a track record of growing its revenue from $1.8B in 2010 to $3.2B in 2019. The current operating profit margin is only 2.8% and their objective is to achieve 7% target over the medium term with stronger industry and market share growth.
Bolzoni is a smaller business line that manufactures attachments and accessories for forklifts. Bolzoni has recently completed a restructuring to relocate its manufacturing from Homewood, IL to Sulligent, AL. The restructuring is expected to improve the operation in the following years and its operating profit is expected to increase this year with the absence of the $2.5M restructuring charges.
What are the risks
COVID-19 pandemic has negatively impacted the demand side of the lift truck business. Lots of uncertainty exists in the company's core lift truck business as bookings have been down due to the lockdown. The company has taken actions to reduce the operating cost such as reducing the base salaries for all the salaried employees. The near-term results from the core business will not look pretty and the recovery time could be slow depending on the market condition.
The management has been conservative and the debt level has been low with high interest coverage ratio. The risk of going out of business is not my concern.
On the other hand, the outlook of fuel cell business still looks positive as China is stimulating to recover its economy with a focus on the new infrastructure and clean energy adoption. This tailwind has been confirmed by the recent new high of BLDP. Here is recent news about a new order received by BLDP in China: https://ca.finance.yahoo.com/news/fuel-cell-stock-rallies-17-161313923.html
Last but not least - chart
HY seems to have hit the support level and is being traded around the historically low market cap. The MA lines are still trending down, which reflects a general pessimistic sentiment on the stock. 
If you are looking for a quick rebound in the near term, this is not the right place to enter. However, if you are willing to build a position and wait a couple of years for the market to discover this company, now is a good time to acquire some shares at current prices.
The smart money is very patient and can wait years for a full fruition to come. If the insiders paid $50/shares, I'm happy to pay less than $40 now especially when the inflection point is around the corner.
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