Buying Opportunity With ERI

Earlier last month, Energy Recovery Inc., the clean-tech shining star, made an IPO which shook the dead IPO market.

ERI reported their Q2 results this week, with revenues growing over 240% to $12 million. They reported EPS of $0.01 in the quarter, compared with a net loss of $0.01 a year ago. The company expects revenue of $6.8-$7.2 million with net income of breakeven to $300,000. For the year, they expect revenues of $49-$51 million with EPS of $0.14-$0.15.

ERI is the world’s leading manufacturer of energy recovery devices which desalinate sea water to transform it into fresh water. Their devices have helped reduce the cost of desalination and have made the sea an economic energy and water source. Based in San Leandro, California, ERI has a presence worldwide: the company recently won desalination contracts in UAE and China, where their technology will supply 90,000–100,000 cubic meters per day of potable water.

The stock slipped 12% to $9.02 in morning trading. Earlier, it hit a new 52-week low of $8.88.

Despite the decrease, I still have my money on the stock, and would heartily encourage you to use this as a buying opportunity. The company has a very strong product, leadership and market potential. As I discuss in a Vision India 2020 post, desalination technology is an energy-efficient way to solve a global problem.

Citi initiated coverage today on ERI with a Hold and a price target of $11 for the year. Their analysis: “Our rating is driven by valuation concerns only, not fundamentals. The key investment highlight for the company is the prospects for the industry itself. ERI provides an enabling product for the specific water market of sea water reverse osmosis desalination – which has been growing at a rate of 19%-20% overall, with large projects, where ERI’s product is increasingly utilized, growing at a faster rate of 40%-50%. We believe that ERI’s product, which drives down the cost of desalination, is a driver of the growth in new projects planned. Currently, there are few pure plays in the water equipment industry.”

I pretty much share this point of view, and have included ERI in my Seven Stocks For Long-Term Hold list.