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Short-Term Troubles For ERI Don’t Dampen Prospects

Posted on Monday, Mar 7th 2011

According to the U.N. Food and Agricultural Organization (FAO), 1.8 billion people will be living in regions plagued by absolute water scarcity by the year 2025. The agency predicts that two-thirds of the global population will be under “water stress conditions.” Global water shortages will drive the need for efficient water supply solutions not only in the emerging markets like China, India, and Latin America, but also in the United States. The U.S. Environmental Protection Agency (EPA) predicts spending of $277 billion by 2020 to maintain present standards. The American Society of Civil Engineers pegs domestic infrastructure spending needs to reach $1 trillion over the next two decades. What’s more, early last year the California Department of Water Resources reported that drought conditions in the state’s Central Valley, its main agricultural region and provider of much produce to the entire United States, were so severe that farmers had to bulldoze orchards and artichoke fields for lack of water. In such conditions, water desalination will be a big growth industry. Annual production of desalinated water is expected to reach 14.2 trillion gallons by 2020. Water desalination players like Energy Recovery Inc. (NASDAQ: ERII) will benefit from this demand in the long run. But in the near future, they are still struggling.

ERI’s Financials
ERI’s Q4 revenues fell 17% over the year to $13 million compared with the market’s expectations of $18.1 million. The loss of $0.03 per share was also worse than the Street’s expected break even for the quarter. The company ended the year with revenues of $46 million and a loss of $0.07 per share.

For the current year, the company has projected revenues of $36 million–$45 million with expectations of loss of $0.13–$0.19 per share. The Street was looking for break even on revenues of $56 million for the year.

The company’s recently appointed CEO, Thomas S. Rooney Jr., said that the weak performance is owing to the “delayed effects of the global economic downturn.” But, in the current year, ERI is seeing increased activity on smaller desalination projects.

ERI’s Product Expansion
ERI recently launched AquaBold and AquaSpire, a new range of high-pressure pumps for desalination. AquaBold is a multi-stage reverse osmosis high-pressure pump with a unique new internal component protection system (ICPS) that acts as an “anti-crash” feature to help protect its internal components in the event of damage to the pump. The AquaSpire high-pressure single-stage seawater or brackish water pump allows custom hydraulics of the pump to be adjusted according to changes in system conditions such as plant expansion. The scalability of the pump helps make it more cost effective for users. Besides maintaining ERI’s customary high efficiency standards, the two pumps also help owners to manage costs by requiring less maintenance than other pumps: They require little or no maintenance for more than 20 years.

ERI’s Global Expansion
As part of its expanding global footprint, ERI completed the shipment to the world’s largest desalination plant in Magtaa, Algeria. The plant will be supplying 500,000 cubic meters of potable water a day to the country. The company also contracted to supply pressure exchangers at two new seawater reverse osmosis desalination plants under construction along the Mediterranean coast of Spain. The Moncofa desalination plant and the Oropesa desalination plant will provide 80,000 cubic meters of fresh water a day to the coastal region.

ERI’s stock is trading at $3.30 with a market capitalization of $173 million. Earlier this month it touched a 52-week low of $2.95. But, despite the lackluster performance and stock’s recent fall, I continue to believe in the long-term potential of the company. Its technologies will only become more necessary. And as the global credit crunch eases, large-scale infrastructure projects will gain momentum. Water desalination is one of the most critical infrastructure categories that the world will be investing in during this decade, and ERI is ideally positioned to harness the upside. Now is a good time to buy the stock.

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