What: Shares of Energy Recovery (NASDAQ:ERII) were up more than 25% on Friday morning after it reported much stronger than expected third-quarter results.

So what: Energy Recovery reported $12.1 million in revenue, which was not only 126.6% higher year over year, but beat the consensus estimate by more than $3 million. Revenue was boosted by strengthening demand and sales in the global desalination market.

That said, the company did still lose money this quarter, reporting a loss of $300,000, or $0.01 per share. However, that was an improvement from the loss of $5.5 million, or $0.11 per share, from the year-ago quarter and better than the $0.05 per-share loss that analysts were expecting.

Aside from higher revenue, the other contributing factor to the company's narrowing loss was a dramatic 1,500-basis-point improvement in its gross margin. Overall, its gross margin was 59% versus 44% in the year-ago quarter, with a 5% reduction in operating expenses to $7.4 million contributing to the margin improvement.

Another major positive development was its recent 15-year, $125 million exclusive licensing agreement with Schlumberger (NYSE:SLB) for the use of its VorTeq hydraulic pumping system. It is now focused on fully commercializing and customizing the VorTeq design for seamless integration into Schlumberger's operations. Energy Recovery believes that this could save Schlumberger as much as $5 per barrel on a frack job and could cut the number of pumps needed from 20 down to as little as four.

Now what: Thanks to its strong showing in the third quarter as well as its recent deal with Schlumberger, Energy Recovery believes it has a bright future ahead of it. That said, with today's gain as well as the previous gain upon the announcement of the Schlumberger deal, the stock is up more than 100% for the year. While some of this enthusiasm is warranted, the stock is now trading at a very rich multiple, suggesting that any stumbles could really burn new investors.

 

Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.