One of the main US news this weekend is the danger of death and unprecedented heat wave in the Pacific Northwest, which is breaking all-time records and is expected to last until next week.
The scientific community largely attributes this event to climate change, or global climate change resulting in large part from human activities that generate greenhouse gases.
For this article, it doesn’t matter what you believe is the cause of climate change; the relevant fact is that the Earth is warming up. This means that readily accessible freshwater supplies are likely to continue to decline while at the same time, demand is expected to continue to rise due to increasing global population and waves of people in developing countries entering. in the middle class.
In view of this unsustainable situation, the use of desalination – the removal of salt from seawater or brackish water to produce potable water – will continue to expand at a sustained rate in the water poor areas of the world, in my opinion.
If you agree with this thinking, you might consider buying shares of a desalination specialist. Energy recovery (NASDAQ: ERII), which has the potential to be a long-term winner. That said, this small cap stock is not suitable for conservative investors as it has been quite volatile and this volatility may continue.
Energy recovery activity
Energy Recovery, located in the San Francisco Bay Area, was founded in 1992 and went public (IPO) in 2008.
The main platform of the company is its pressure exchanger technology. Using this platform, it invented its first energy harvesting device for seawater desalination plants using reverse osmosis technology (SWRO), which is now the technology of choice for seawater operations. desalination. The company started selling its initial product in 1997 and has since expanded to related products for desalination plants.
Last year marked the fifth consecutive year for Energy Recovery to generate record revenues in its desalination business. The company attributed the achievement to “the growing demand for potable water globally, as well as the technological conversion that is occurring within the industry as thermal desalination plants begin to be decommissioned and replaced. by reverse osmosis plants “.
Energy Recovery is currently developing several new products based on its technology platform of pressure exchangers and other technologies that can be used for other applications involving liquids and gases. As with its desalination products, the objective of the products it develops is to make industrial processes more efficient (which equates to cost savings) and respectful of the environment.
In the release of the company’s first quarter 2021 results, CEO Robert Mao said he was “particularly excited about our progress in developing an energy recovery device for commercial carbon dioxide refrigeration. (CO2) “. He added: “The US Environmental Protection Agency this week [early May] announced accelerated phase-out of HFCs [hydrofluorocarbons], which should accelerate the adoption of CO2 technology in the United States in the years to come. Our tests indicate that our solution excels at saving energy where today’s market-leading technology fails – in warmer climates. “
In the first quarter of 2021, Energy Recovery’s revenue jumped 34% year-on-year to $ 28.9 million, thanks to a 52% increase in revenue from what it calls its water segment, which is now its only segment. Net income was $ 6.9 million, or $ 0.12 per share, up 1,100% from $ 0.01 per share a year ago. That result was double the Wall Street consensus estimate of $ 0.06.
That said, the company’s revenue and profits for the year 2021 are expected to decline from 2020, but there is a good reason: the early termination in June 2020 of a 2015 license agreement. with Schlumberger which gave the oil services giant exclusive use of the VorTeq hydraulic pumping system being developed by Energy Recovery. As such, Energy Recovery will not generate any Schlumberger license income in 2020.
Mao attributed the termination of the agreement to the two companies with “different strategic perspectives on the way forward for commercializing VorTeq.” Energy Recovery has not given up on continuing to market this product, although it could happen.
The loss of license revenue is just a short-term setback. The company’s main desalination business is developing well and is expected to continue to do so. In addition, the company should have additional sources of income from new products, although it could take a few years.
Stock and related financial statistics
P / E ratio
P / E forward
|Wall Street’s projected annualized EPS growth over 5 years||1 year return||10 years back|
|Energy recovery||$ 1.2 billion||36.6||89.7||20%||149%||594%|
With a forward P / E of around 90, Energy Recovery stock is very expensive considering its earnings will only grow at an average annual rate of 20% over the next five years after the contraction. of this year. But there’s good reason to believe that analysts who follow the company are significantly underestimating its potential for earnings growth. Over the past four quarters, Energy Recovery has demolished the Wall Street consensus earnings estimates of 100% (first quarter 2021), 50% (fourth quarter 2020), 233% (third quarter 2020), and 230% (second quarter 2020).
Insiders have significant in-game skin, as they own around 13% of the company’s stock, according to finviz.com.
Energy Recovery has a strong track record. He ended the first quarter with cash, cash equivalents and short-term investments of $ 120 million. He has no debt.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.