It's no longer news that the earth is running short of fresh water. Statistics have it that about 40 percent of the world's entire population has little or no access to fresh water. Even more worrying is the fact that two-thirds of the world's population could find it difficult to come by fresh water by 2025. This doesn't exclude the U.S., as the Ogallala Aquifer, America's biggest underground water source, is also running dry. This means that we would need to start looking for means of making water fresh. One of the ways to achieve this is by desalinating saline water.
Energy Recovery, Inc. (NASDAQ: ERII) is one of the companies that is making this approach successful. In fact, this company controls the desalination market, owning 90 percent of the entire market. But before diving into company-specific details, let's be sure that this industry that's being controlled by a small-cap company is worth considering.
The rate at which the world is running out of fresh water is so high that the salt removal and wastewater recycling technologies is expected to grow by 11.4 percent over the next four years, to reach a total market value of $12 billion by 2025. Note that this is not the only aspect of the business of desalination. Therefore the potential in this industry are enormous.
Since Tom Rooney took control at Energy Recovery in 2011, the company has seen significant improvement. Most notably in the area of operations is the cutting down of production costs. As you would expect, this has yielded positive returns in the company's gross margins, rising by over 25 percent since the beginning of 2012 to over 50 percent as of the time of writing.
Another thing that makes this company attractive is that it's investing in growth. The company's R&D expenses over the last few years have been on the rise, increasing by over 18 percent since 2010. And according to the company, R&D expenses are expected to continue to rise. Impressively, its investments in R&D are yielding dividends, with the company boasting of a patent for its PX line of products. These devices consume no electrical energy, thereby reducing energy costs associated with the seawater reverse-osmosis process. In a world where the need for clean energy is constantly on the rise, these sorts of products have the potential of controlling the market over the longer term.
The company's fluctuating top and bottom lines are two of the reasons its stock is at the level it is currently. It appears investors are yet to have confidence that this company can be profitable. But as indicated by the company's newfound efficiency, it will eventually become profitable as the industry continues to gain traction. So this could be a good play for green investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.