Energy Recovery’s stock price has taken a beating over the past six months, shedding 26.3% of its value and falling to $10.75 per share. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in Energy Recovery, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Energy Recovery Not Exciting?
Despite the more favorable entry price, we don't have much confidence in Energy Recovery. Here are three reasons we avoid ERII and a 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 have short-term success, but a top-tier one grows for years. Over the last five years, Energy Recovery grew its sales at a sluggish 2.6% compounded annual growth rate. 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 10.3%, a decrease from its 2.6% annualized growth for the past five years. This projection is underwhelming and implies its products and services will see some demand headwinds.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Energy Recovery’s ROIC has decreased over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Energy Recovery isn’t a terrible business, but it isn’t one of our picks. Following the recent decline, the stock trades at 17.2× forward P/E (or $10.75 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are more exciting stocks to buy at the moment. Let us point you toward one of our top digital advertising picks.
Stocks We Would Buy Instead of Energy Recovery
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