Energy Recovery: Strong Buy

Seawater desalination leader Energy Recovery Inc’s, (ERII) Q3 results were disappointing compared with the previous year’s performance, yet the company managed to beat both market expectations and last quarter’s outlook.

Revenues of $9 million were substantially higher than the Street’s expectations of $7 million, but represented an 18% drop over the $11 million in sales reported a year ago. The company also beat expectations of a one-cent loss for the quarter by recording EPS of $0.01. Profits, however, fell a substantial 83% from the $0.06 recorded a year ago.

For Q4, Energy Recovery gave revenue outlook of $20-$22 million with EPS of $0.07-$0.08. They are expecting to close the fiscal 2008 with revenues of $50-$52 million with EPS of $0.14-$0.16, a testimony to the somewhat lumpy nature of the industrial technology business. If you can take the lumpiness in your stride, the business is still solid at those revenue and profitability levels.

Management attributed the company’s performance to the strong demand from their OEM customer group, which is currently running projects with just under 50,000 cubic meters per day. They expect this demand to continue in the coming quarters.

Energy Recovery’s low-cost desalination devices have helped them continue on the path of international expansion. During the quarter, they won a 200,000 cubic meter/day project in Algeria, a 60,000 cubic meter/day project in Spain, a 140,000 cubic meter/day project for a mining project in Australia and a 55,000 cubic meter/day project in Barcelona.

The stock had slipped to a new year low of $4.57 but has since recovered and is trading at $5.82, with a market cap of $295.6 million. At the current price, Michelet’s company continues to be a very good buy. Buy it now, and hold it for 2 years, and you will likely at least double your money, probably triple.