ERII, A Battered BUY

According to report published by SRI Consulting Process Economics Program titled “Reverse Osmosis for Seawater Desalination,” large-scale seawater reverse osmosis growth rates will increase at rates of more than 15% annually in China and the U.S. after 2015. The researcher expects that by that time, these two countries will have established both the financial and political models needed to be able to pursue large-scale plant projects. The current market conditions, however, are making it tough for countries to put money toward high-investment desalination projects.

ERI’s Financials
As a result, Energy Recovery (Nasdaq:ERII) saw Q2 revenues fall 50% over the previous year to $6.6 million driven by a significant fall in the shipments of pressure exchange devices, turbochargers, and pumps. The loss of $0.06 per share also increased over the previous year’s loss of $0.01 per share.

The management decided not to declare an outlook for the coming quarters as they do not expect the market to improve in the near future. However, they did lower their earnings outlook for the current year and for 2012 to a net loss of $$0.23 and$ 0.19 per share, respectively, from a net loss of $0.15 and $0.01 per share, respectively. Analysts also lowered their revenue estimates for the current year’s revenues from $36.2 million to $31.8 million, and revenues for the next year are projected to now be $37.3 million compared with the $50.6 million expected earlier.

During the quarter, the only new project announcement that the company made was for the use of their pressure exchanger devices in the Bahamas.

ERI’s Cost-Control Drive
ERI also sharpened its focus on controlling costs and recently announced plans to consolidate North American operations. They plan to move their Michigan operations, where pumps and turbocharges are assembled, to the existing headquarters and production center in San Leandro, California. Apart from controlling costs by an estimated $3 million per year, the move is also expected to help the company to improve internal efficiencies.

ERI’s stock is trading at $2.56 with a market capitalization of $134.75 million. It was at a 52-week high of $4.36 in January of  this year. The stock is extremely cheap, and if you are a patient investor, now is a good time to buy some. If you already own the stock, as I do, I’d suggest holding on to it for a long-term play.