Last Update 05 Dec 25
Fair value Decreased 1.94%ERII: Rising CO2 Refrigeration Adoption Will Drive Long-Term Upside
Analysts modestly lifted their price expectations for Energy Recovery, pointing to stronger long term profitability and supportive new targets in the high teens to low twenties, including a recent move to $23 from $17, even as they temper near term revenue growth assumptions.
Analyst Commentary
Recent Street research highlights a constructive but selective view on Energy Recovery, with valuation targets moving higher as analysts balance solid execution in core markets against pacing risks in newer growth channels.
Bullish analysts point to the company’s progress in CO2 refrigeration and overall profitability as key drivers supporting higher price targets in the high teens to low twenties, while still acknowledging that some adoption curves are tracking more slowly than initially anticipated.
Bullish Takeaways
- Higher price targets in the mid to high teens and low twenties reflect confidence that long term earnings power is underappreciated in current valuation multiples.
- Performance in CO2 refrigeration is seen as validating the company’s technology and reinforcing the runway for revenue growth as installations scale.
- New coverage initiations with Outperform style ratings underscore a view that execution in core markets and disciplined cost controls can drive margin expansion.
- Bullish analysts view the expanding opportunity set as supportive of a premium multiple relative to peers with less differentiated technology.
Bearish Takeaways
- Original equipment manufacturer adoption for CO2 refrigeration is running about a year behind prior expectations, highlighting execution risk in newer verticals.
- Delays in uptake could compress near term growth versus prior models, limiting the pace at which valuation can re rate even with higher long term targets.
- Some analysts see a risk that slower partner adoption may require incremental investment or incentives, potentially weighing on near term profitability.
- Mixed timing signals on rollouts encourage a more cautious stance on forecasting, with limited room for further multiple expansion if execution does not accelerate.
What's in the News
- Energy Recovery completed repurchases of 626,440 shares, about 1.17% of outstanding shares, for $8.4 million between July 1 and September 30, 2025, finishing a $30 million buyback totaling 2,183,648 shares, or roughly 4% of shares outstanding (company buyback update).
- The company reported no share repurchases between August 6 and September 30, 2025 under a separate buyback authorized on August 6, 2025, leaving that program with zero shares repurchased to date (company buyback update).
Valuation Changes
- The fair value estimate has edged down slightly, from $18.60 to $18.24, reflecting modestly lower growth assumptions.
- The discount rate has risen slightly, from 8.26% to 8.29%, implying a marginally higher required return on equity.
- The revenue growth forecast has fallen meaningfully, from about 18.64% to 15.59%, indicating more conservative expectations for top line expansion.
- The net profit margin has improved, rising from roughly 27.22% to 29.44%, signaling expectations for stronger long term profitability.
- The future P/E multiple has eased slightly, moving from about 18.05x to 17.72x, suggesting a modestly lower valuation multiple on forward earnings.
Key Takeaways
- Strong positioning in desalination and industrial wastewater, driven by global trends and innovation, supports long-term revenue growth and margin expansion.
- Diversification into industrial and refrigeration sectors enhances earnings stability and aligns with decarbonization, creating new growth and operational efficiency opportunities.
- Dependence on desalination, limited product diversification, and geopolitical risks threaten revenue growth and profitability, while delayed new product adoption further impedes market expansion.
Catalysts
About Energy Recovery- 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.
- Broad global trends of increasing water scarcity and regulatory-driven mandates for water reuse and efficiency are accelerating commitments to desalination and industrial wastewater projects, fueling strong revenue pipeline visibility and robust future revenue growth.
- Continued innovation and upcoming launches of next-generation pressure exchanger products, which are expected to command higher average selling prices and improve gross margin, position the company to sustain or expand net margins over the long term.
- Demonstrated resilience and rapid execution in strategic markets such as China, despite tariff headwinds, indicate management's operational ability to unlock pent-up demand, which should support both near-term and recurring revenue growth.
- Progress and expanding reference cases in adjacencies like industrial wastewater (across multiple high-value sectors) diversify revenue, mitigate single-market dependency, and provide new pathways for earnings stability and growth.
- Momentum in energy-efficient refrigeration (CO2 PX) technology adoption-supported by rigorous OEM engagement and reliability testing-aligns with global decarbonization trends and could lead to material incremental revenue streams and improved operating leverage.
Energy Recovery Future Earnings and Revenue Growth
Assumptions
How have these above catalysts been quantified?- Analysts are assuming Energy Recovery's revenue will grow by 15.7% annually over the next 3 years.
- Analysts assume that profit margins will increase from 17.0% today to 25.2% in 3 years time.
- Analysts expect earnings to reach $55.3 million (and earnings per share of $0.87) by about September 2028, up from $24.1 million today.
- In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.7x on those 2028 earnings, down from 31.7x today. This future PE is lower than the current PE for the US Machinery industry at 24.7x.
- Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
- To value all of this in today's terms, we will use a discount rate of 7.93%, as per the Simply Wall St company report.
Energy Recovery Future Earnings Per Share Growth
Risks
What could happen that would invalidate this narrative?- Heavy reliance on the desalination end market means that any long-term shift toward alternative water technologies (such as atmospheric water generation or membrane bioreactors) could significantly reduce Energy Recovery's addressable market, posing a threat to long-term revenue growth.
- The company's limited product diversification and ongoing challenges in establishing new revenue streams (evident in the uncertain commercialization prospects for data center and heat pump opportunities) could hinder future top-line expansion if core markets mature or growth stalls, increasing the risk of revenue stagnation.
- Heightened geopolitical risk and tariff uncertainty in critical markets like China introduces volatility and potential disruption to order flow and contract execution, which could negatively impact both revenues and earnings consistency.
- Ongoing "testing seasons" required to validate reliability and performance of new product generations, such as the PX G for industrial and refrigerant applications, create a long timeline for broad OEM adoption-delaying market penetration and revenue realization from these initiatives.
- Potential for commoditization in the desalination industry and increased pricing pressure (especially from international competitors) threatens gross and net margins, which may erode overall profitability even in a growing market.
Valuation
How have all the factors above been brought together to estimate a fair value?- The analysts have a consensus price target of $16.5 for Energy Recovery based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $20.0, and the most bearish reporting a price target of just $14.0.
- In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $219.6 million, earnings will come to $55.3 million, and it would be trading on a PE ratio of 15.7x, assuming you use a discount rate of 7.9%.
- Given the current share price of $14.38, the analyst price target of $16.5 is 12.8% 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.
How well do narratives help inform your perspective?
Disclaimer
AnalystConsensusTarget is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by AnalystConsensusTarget are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that AnalystConsensusTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.
