Energy Recovery’s stock price has taken a beating over the past six months, shedding 41.3% of its value and falling to $8.60 per share. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy Energy Recovery, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Energy Recovery Not Exciting?
Even with the cheaper entry price, we don’t have much confidence in Energy Recovery. Here are three reasons we avoid ERII, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Regrettably, Energy Recovery’s sales grew at a sluggish 1.6% compounded annual growth rate over the last five years. This fell short of our benchmarks.
2. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Energy Recovery’s revenue to drop by 32.9%, a decrease from its 1.6% annualized growth for the past five years. This projection is underwhelming and suggests its products and services will face some demand challenges.
3. EPS Growth Has Stalled
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Energy Recovery’s flat EPS over the last five years was below its 1.6% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
Final Judgment
Energy Recovery isn’t a terrible business, but it doesn’t pass our bar. After the recent drawdown, the stock trades at 80.2× forward P/E (or $8.60 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better stocks to buy right now. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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