Energy Recovery: Too Much Competition

Shares in Energy Recovery Inc. (ERII) rose more than 5 percent September 15, after the company announced that its energy recovery device–PX Pressure Exchanger (PX™)–had been selected by IDE Technologies for use in its expansion of what will be the world’s largest seawater reverse osmosis (SWRO) desalination plant in Hadera, Israel.

With worldwide demand for fresh water growing ever faster as populations increase and fresh water supplies are depleted or ruined by pollution and bad management practices, countries are increasingly turning to technology as a means of alleviating water shortages.

While distillation processes for desalination are used in most of the world’s 10,000-plus desalination plants, in the last 10 years reverse osmosis desalination has emerged as the technology of choice due to its lower energy consumption and costs.

And Energy Recovery Inc. has developed technology that makes SWRO desalination even more cost effective, claiming that its PX technology can reduce SWRO energy consumption by up to 60 percent.

With the United Nation’s forecasting that 50 percent of the world’s population will live in water stressed areas by the year 2025, and the U.S. government predicting that 36 of its states face water shortages within the next five years, large scale desalination is undoubtedly going to play an ever increasing role in producing potable water in countries around the world.

In fact, Lux Research estimated that the world’s capacity to desalinate water will triple between 2008 and 2020. And with energy costs being a prime hindrance to the acceptance and building of desalination plants (both distillation, and, to a lesser extent, SWRO), Energy Recovery Inc.’s technology should continue to receive growing interest and rising sales numbers ... for the time being, anyhow (more on this below).

With the world’s water supply “threatened,” “endangered,” “reaching its peak,” or any number of dire predictions depending on the pundit, we have been examining water-related investments to find those that will deliver profits to their investors along with potable, clean water to an ever thirstier world.

And while looming water shortages and ongoing quality impairment is a significant and growing worldwide problem, the mainstream media has yet to climb onto the “crisis” bandwagon. But as soon as they start trumpeting it en masse, the stocks of currently-staid water infrastructure companies and emerging water-technology plays are going to start acting like those of the oil industry.

This being said, we must admit that Energy Recovery Inc. certainly piqued our interest. In August, the company’s share price took a hit, falling from about $7 to $5, after the company released second quarter results that included a small net loss and revenues below expectations and previous guidance.

ERII’s president and CEO said at the time that the shortfall was caused by

continued turmoil in the financial sector [resulting] in some delays in expected product shipment dates for several projects.... Ultimately, these projects are driven by water scarcity, and we continue to believe these projects will be built.

We would have to concur with this assessment and believe that the company will continue to grow its year-over-year revenue stream by more than 50 percent ... for the short term, anyhow. The company, currently trading at just under $6 per share, and with a price to earnings ratio of about 42 and price to sales ratio of about 5.50, is priced like a typical technology company.

As a water-technology company that had recently taken a hit due to missed expectations, Energy Recovery seemed to be a “buy.” However, the company’s technology faces the threat of becoming outdated, as other entities are vying to “build a better mousetrap.”

Siemens Water Technologies, a subsidiary of Siemens AG (SI), has reportedly developed new technology that desalinizes water at half the energy of other processes.

General Electric (GE), which is the world’s largest supplier of SWRO systems, is reportedly investing significant resources in the development of cost-effective, solar powered desalination systems.

According to the Toronto-based Globe and Mail, a University of Ottawa chemical engineering Ph.D. student has applied for desalination patents for technology that is alleged to be between 600 and 700 percent more efficient than current technologies. The student has received more than $250,000 in funding from the Middle East Desalination Research Center, and is expecting to receive venture capital funding once his concepts have been proven with a pilot project that is currently under development.

If any of these competing mousetraps prove viable and go on line, ERII’s PX system is going to quickly go the way of the Edsel. Despite our initial interest, we feel that the company is a risky, one-trick pony that is especially vulnerable to its competitors or negative news flows.

Disclosure: No positions.

Comments

[bartpr:]

si seems to have a market in the line of small capacity ro systems.
where is their big million gal per day units.

ge with tis solar power plans. big units need large power plants to feed the pumps.

new patents. just becuase a new patent is issued does not mean the
invention works.

erii will do well in the next two to three years. after that who know what will come.

Sep 17 08:41 AM

[Alan Young:]

Thanks--very informative and spot-on with the stock's action.

Sep 17 09:38 AM

[experienced:]

Siemens recently entered into an agreement with a small Israeli company specializing in desalination. As far as I have been able to determine, this technology doesn't exclude or make obsolescent the ceramic device made by Energy Recovery. If distillation were the preferred technology, there would be no need for the ERII product, but the fact is that reverse osmosis seems to be by far the most cost effective way of obtaining fresh water from sea water.

Sep 17 02:51 PM

[Veteran Des...:]

The last five paragraphs are proof that it doesn't take any brains to be a stock analyst. The author's interpretation is laughable inaccurate.

Sep 17 06:23 PM

[billymadisun:]

i own a stock Dais Analytic that ive had forever, supposedly they make the best filters for desalination and they've recently had a big run-up.. can u do a report on them regarding water-plays?

Thanks

Sep 17 09:55 PM

[drmilt:]

Your comments make complete sense.


On Sep 17 02:51 PM experienced wrote:

> Siemens recently entered into an agreement with a small Israeli company
> specializing in desalination. As far as I have been able to determine,
> this technology doesn't exclude or make obsolescent the ceramic device
> made by Energy Recovery. If distillation were the preferred technology,
> there would be no need for the ERII product, but the fact is that
> reverse osmosis seems to be by far the most cost effective way of
> obtaining fresh water from sea water.

Sep 18 05:53 AM

[drmilt:]

This analyst just doesn't get it. Why doesn't SI or GE buy out ERII to simplify everything ? Their technology is sound , experienced, and they have excellent market share.

Sep 18 05:58 AM

[Semore:]

A very important aspect that must be kept in mind is that the water industry is very conservative, perhaps the most conservative industry in the world. Water utilities are charged with supplying the only commodity that people ingest and must maintain a reliable supply. While the new technologies that GE, Siemen's, and some guy in his garage are working on, it takes years to convince a water utility to try a new product even though it may be superior to exisiting technology that have been proven to work. ERII's technology (while not the latest and greatest) is the top dog in the energy recovery industry and it is not likely it will be knocked off that pedestal any time soon.

Oct 06 10:31 AM