PX Technology Will Expand Into Mining And Textiles, Tapping New Markets By 2025

Key Takeaways

• Expansion of PX technology into various industries and international markets can boost growth, diversify revenue, and reduce geographic risk.
  
• Efforts in cost reduction and operational efficiency aim to enhance margins, while cash flow confidence drives share buyback, solidifying shareholder value.
  
• Geographical concentration and tariff impacts pose risks to revenue stability and diversification, with potential setbacks in global market expansion affecting 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.

• Energy Recovery's PX technology has potential commercial applications in several verticals, including mining, heavy and chemical manufacturing, and textiles, which could drive significant revenue growth as these industries aim for energy and water efficiency improvements.
  
• The company's ongoing manufacturing transformation efforts, which focus on efficiency improvements and cost reductions across various production processes, are expected to enhance gross margins in 2025, positively impacting net margins and overall earnings.
  
• Expansion into international markets such as Japan and South Africa for the PX G product can provide new revenue streams outside of the core regions, potentially reducing geographic revenue concentration risk and boosting top-line growth.
  
• Energy Recovery's confidence in cash flow prospects, leading to the announcement of a $30 million additional share buyback, suggests robust earnings potential and solidifies the financial strategy to enhance shareholder value through capital returns.
  
• A significant portion of the wastewater business revenue comes from China, indicating that systematic geographic diversification or successful navigation of trade policy changes could mitigate risks and potentially unlock additional revenue opportunities.

Energy Recovery Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Energy Recovery's revenue will grow by 12.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 15.9% today to 24.5% in 3 years time.
• Analysts expect earnings to reach $51.0 million (and earnings per share of $0.88) by about March 2028, up from $23.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.8x on those 2028 earnings, down from 38.5x today. This future PE is greater than the current PE for the US Machinery industry at 21.4x.
• Analysts expect the number of shares outstanding to decline by 4.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.16%, as per the Simply Wall St company report.

Energy Recovery Future Earnings Per Share Growth

Risks

• The potential impact of tariffs on the wastewater business, especially exports to China, could degrade the return on investment for customers, impacting revenue projections.
  
• The focus on a limited number of verticals for new applications means the business's growth is reliant on successful expansion into these markets, presenting a risk to diversification and revenue stability.
  
• The company's reliance on revenue from the Middle East and North Africa, which was over 60% in 2024, poses a geographical concentration risk, potentially affecting revenue if geopolitical or economic changes arise in those areas.
  
• If the expected manufacturing efficiencies and cost reductions are not realized as planned, this could negatively impact gross margins and overall earnings.
  
• Any setbacks or delays in expanding the CO2 market outside of core areas like Europe and the U.S. could limit revenue growth opportunities in those promising regions like Japan and South Africa.

Valuation

• The analysts have a consensus price target of $19.667 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 $22.0, and the most bearish reporting a price target of just $17.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $208.0 million, earnings will come to $51.0 million, and it would be trading on a PE ratio of 22.8x, assuming you use a discount rate of 7.2%.
• Given the current share price of $16.16, the analyst price target of $19.67 is 17.8% 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.