Global Water Scarcity And Decarbonization Will Unlock Long-Term Opportunities

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

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

• 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 August 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 32.2x today. This future PE is lower than the current PE for the US Machinery industry at 23.8x.
• 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 7.94%, as per the Simply Wall St company report.

Energy Recovery Future Earnings Per Share Growth

Risks

• 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

• 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 $14.62, the analyst price target of $16.5 is 11.4% 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.