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Why Energy Recovery, Inc. Stock Dropped 15%

By Rich Smith - Nov 3, 2016 at 12:27PM

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It's going to be hard to recover from this big earnings miss.

Desalination should be a big business for Energy Recovery, Inc., but so far, it's not showing up in the revenues. Image source: Getty Images.

What happened

Energy Recovery (ERII 1.65%) manufactures industrial equipment for the fracking and desalination industries -- two areas that you'd expect to be growing briskly in the modern environment of water shortages, and an energy industry reliant on fracking for oil and gas production. Unfortunately, things aren't working out quite as planned.

Last night, Energy Recovery reported third-quarter earnings featuring only 1% growth in sales and no profits whatsoever on those sales (actually, a $0.01-per-share loss). The results caught Wall Street off guard, where analysts had been predicting a $0.06-per-share profit for Energy Recovery stock -- and sent Energy Recovery shares plummeting. As of 10:45 a.m. EDT on Thursday, Energy Recovery shares were down 14.9%.

So what

Management continues to boast of its "record gross profit margins," even as on the bottom line, its net income continues to disappoint. In fact, this is the third time in the past four quarters that Energy Recovery has delivered a negative earnings surprise, and investors appear to be getting tired of the repetition.

Worse, Wall Street has been telling investors to expect $0.67 per share in full-year earnings out of Energy Recovery this year -- a target that's getting increasingly hard to hit as the company repeatedly misses earnings.

Now what

Current estimates call for Energy Recovery to earn $0.43 per share in its fourth and final quarter of the year, so a lot's going to be riding on Energy Recovery's performance in Q4. Management, however, gave no guidance in its earnings report, and so no reassurance that it will hit Wall Street's target.

If investors are getting nervous and abandoning the stock today, you can hardly blame them.

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