Why I Like It
This is a small cap stock in a “risk on”environment.
Small cap stocks have been out-performing of late.
Consistent monthly increases in the Zacks Consensus Estimate for 2016 and 2017
Potential return to favor sector following recent OPEC news.
The Recent Numbers
I like to do a review of the most recent quarter for stocks that I highlight as Bulls of the Day. ERII reported the June 2016 quarter back in early August, so we are a month away from the company reporting the September quarter.
The most recent quarter was a beat on bottom. The company posted EPS of $0.01 when the Zacks Consensus Estimate was calling for a loss of $0.01. Revenue came in $1M below expectations for a 1.2% negative revenue surprise. As a result, the stock was bid up by 12.5% in the session following the report.
Energy Recovery is an energy solutions provider to industrial fluid flow markets. The Company’s solutions convert wasted pressure energy into a reusable asset and preserve or eliminate pumping technology in hostile processing environments. It operates through two segments: Water, and Oil & Gas. Its Water Segment focuses on products sold for use in reverse osmosis water desalination. Its Oil & Gas Segment consists of products sold for use in gas processing, chemical processing, and hydraulic fracturing.
The company has a good history of beating the Zacks Consensus Estimate. There has been one miss, one meet and three beats in the last five reports.
The estimate picture is a thing of beauty, with the Zacks Consensus Estimate for 2016 moving higher in each of the last four months. The 2016 number moved from $0.43 in June to $0.50 in July. Then two cents were added in August and another three cents in September to bring the current estimate to $0.55.
The 2017 number also moved higher with the 2016 estimate, jumping up from $0.38 in June to the current reading of $0.47.
Investors have to pay up for growth like this. Keep in mind that ERII is slated to show earnings growth of nearly 600% and revenue growth of more than 115% this year. This has driven the forward PE to more than 29x while the industry average is at 22x. The price to book multiple of 14x seems out of whack, but the 5x industry average is also looking rather high. Finally, the 16x price to sales number should adjust lower when this year is over and the growth is in place.
Zacks has developed a chart that helps investors see how earnings estimates have impacted the price of the stock over the last several years. We call this chart the price and consensus chart, and each color-coded line represents analyst estimates over a designated year. As estimates increase, the stock tends to follow. The Zacks Rank is impacted by earnings estimate increases, beats and incorporates the idea of analyst agreement and magnitude. As a Zacks Rank #1 (Strong Buy) we see that estimates are moving higher.
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