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33% Of Planet Earth Will Face Water Shortages By 2025

Posted on Friday, May 8th 2009

We have been watching the BBC’s wonderful documentary, Planet Earth. The dangers facing the planet are many. One of them is water shortages.

Water desalination technology leader Energy Recovery Inc (NASDAQ:ERII) had a mixed quarter. Q109 revenues grew 39% to $12.6 million to beat the market’s expectations of $12 million. EPS of $0.03 was in line with the Street’s expectations.

The company stuck with its earlier guidance of $60-$65 million in revenues for the year. However, EPS expectations slid marginally to $0.17-$0.21. For Q2, they expect revenues of $10-$11 million with a breakeven EPS. The Street was expecting annual revenues of $63.2 million with EPS of $0.20 and Q2 revenues of $12.6 million with EPS of $0.03.

While ERI might have disappointed analysts with its outlook, I continue to remain bullish on the stock. The water shortage problem is not going away but instead will likely increase in scope and severity: recent reports by the International Water Management Institute (IWMI) suggest that 33% of the planet will face water shortages by the year 2025. This bleak picture is brightened by the fact that solving the problem brings numerous business venture opportunities, as Dominique Trempont argues in his in-depth analysis. ERI’s global reach should enable it to continue to help tackle such shortages through projects in Australia and South America. AdelaideAgua, a consortium, recently selected ERI’s PX Pressure Exchanger for use at a desalination plant in Adelaide. In March the company won a contract for a plant in Venezuela that is to be the largest reverse osmosis plant in South America.

The choice of vendor for these projects is probably made easier by the fact that ERI has made the entire process not only more affordable but also less taxing on the environment. The company’s product, the Pressure Exchanger, is 98% efficient and reduces energy consumption by nearly 60%. Analysts estimate the product to have been “deployed in 49% of new SWRO [seawater reverse osmosis] facilities in 2008 (versus just 37% in 2005).” ERI itself says that it gained 70% of new large plant SWRO capacity in 2008.

ERI could also look at merger opportunities. Besides back-end integration, they could evaluate other players such as Stonybrook Purification and Water Standard (WS).

As the company is trading at $8.33 with a market capitalization of $417 million, I maintain my stand to hold onto this stock.

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