Rising Water Scarcity And Investment Will Drive Desalination Progress

Key Takeaways

• Growing demand for water technologies and supportive regulations are expanding the company’s addressable market and boosting long-term sales potential.
  
• Diversifying into new applications and international markets, alongside operational improvements, is expected to drive profitability and margin growth.
  
• Overdependence on desalination amid slow diversification, sector volatility, and rising competitive, regulatory, and geopolitical pressures threatens revenue stability, margin strength, and long-term growth prospects.

Catalysts

Designs, manufactures, and sells energy efficiency technology solutions in the United States, North, South and Latin America, the Middle East, Northern Africa, Asia, and Europe.

• Global water scarcity and the accelerating need for efficient desalination and water reuse solutions are expected to drive robust long-term demand for Energy Recovery’s core pressure exchanger products, especially in water-stressed regions like the Middle East, North Africa, and India, leading to sustained revenue growth.
  
• Increasing government and private sector investment in sustainable infrastructure and resilient utilities worldwide, combined with stricter regulations for water conservation and emissions reductions, is fueling new capital expenditures in water and wastewater treatment facilities, expanding the company’s total addressable market and supporting higher future sales.
  
• Commercialization of high-efficiency PX technology is advancing beyond the core desalination market, with near-term catalysts such as pilot deployments, commercial agreements, and expanded applications in the refrigeration industry—most notably with major OEM partners like Hillphoenix—which could create significant new revenue streams in both industrial and retail sectors.
  
• The ongoing expansion of Energy Recovery’s international footprint, particularly a direct presence in major end markets and efforts to localize assembly and service near customers, is poised to increase market share, reduce tariff-related costs, and improve gross margins through operational efficiencies and reduced supply chain friction.
  
• Continued focus on operational excellence and cost structure optimization—including margin expansion initiatives and increased recurring aftermarket/service revenue from a growing installed base—is expected to enhance net margins and support higher, more predictable long-term earnings.

Energy Recovery Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Energy Recovery compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Energy Recovery's revenue will grow by 12.7% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 15.2% today to 30.2% in 3 years time.
• The bullish analysts expect earnings to reach $60.9 million (and earnings per share of $1.11) by about July 2028, up from $21.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 14.7x on those 2028 earnings, down from 34.8x today. This future PE is lower than the current PE for the US Machinery industry at 22.9x.
• Analysts expect the number of shares outstanding to decline by 5.59% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.48%, as per the Simply Wall St company report.

Energy Recovery Future Earnings Per Share Growth

Risks

• The company’s persistent reliance on desalination as its main business leaves it exposed to sector volatility, and slow progress in diversifying into refrigeration and industrial gas could limit growth, ultimately putting long-term revenue and earnings at risk.
  
• Accelerated adoption of alternative water technologies or increased focus on water conservation and recycling may reduce global demand for reverse osmosis desalination solutions, directly impacting Energy Recovery’s core addressable market and reducing future revenues.
  
• Heightened customer concentration and dependence on large, lumpy projects, especially in regions like the Middle East and North Africa, could cause significant quarterly revenue volatility and gross margin swings whenever project timing or geopolitical conditions are unfavorable.
  
• Ongoing exposure to tariffs and trade protectionism, particularly regarding entry into China and established international markets, may constrain global expansion, add cost pressure, and potentially erode net margins over time despite mitigation efforts.
  
• Intensifying competition from established industrial machinery companies and new technological advancements in water treatment could undermine Energy Recovery’s pricing power or disrupt its product relevance, resulting in margin compression and potential loss of market share that would negatively affect both revenue and long-term earnings.

Valuation

• The assumed bullish price target for Energy Recovery is $16.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Energy Recovery's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $16.0, and the most bearish reporting a price target of just $12.5.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $201.5 million, earnings will come to $60.9 million, and it would be trading on a PE ratio of 14.7x, assuming you use a discount rate of 7.5%.
• Given the current share price of $13.67, the bullish analyst price target of $16.0 is 14.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.