ERII

We rate Energy Recovery, Inc. (ERII) as a Hold with a composite score of 56.2/100 at a current price of $16.05. The stock presents a mixed quantitative picture — neither compelling enough to warrant new accumulation nor weak enough to justify selling for existing holders. Our factors are split, and the overall profile suggests patience is warranted.

The rating is primarily driven by strength in stability (78th percentile) and quality (63th percentile), which together account for the majority of the composite score. All factors score above the 40th percentile, indicating no material weakness in the quantitative profile. We assign a Narrow Moat rating (52/100), Medium uncertainty, and Poor capital allocation.

Key items to watch: the path to profitability. Any material change in these dynamics could warrant a reassessment of our rating. The moat trend is stable, which suggests the competitive landscape is stable for now.

Energy Recovery, Inc. holds a top-quartile position (#0 of 50) within the Manufacturing sector, based on our composite quantitative scoring across quality, value, momentum, and stability factors. The composite score of 56.2/100 places it at rank #1123 in our full 7,333-stock universe. At $820M in market capitalization, Energy Recovery, Inc. is a small-cap player in the Manufacturing space, which limits certain scale advantages but may allow for more agile strategic execution.

Revenue is growing at 18%, though momentum at the 48th percentile suggests the market has not yet fully recognized this trajectory. This potential disconnect between fundamental improvement and market recognition could represent an opportunity for patient investors if the growth trend persists.

The margin cascade tells an important story: gross margins of 62% (+19.7pp vs sector) narrow to operating margins of -30% (-31.5pp vs sector) and net margins of -20.3%, yielding a gross-to-net conversion rate of -33%. The significant margin erosion from gross to net suggests elevated operating expenses, high interest costs, or other structural drags that warrant monitoring.

At a current price of $16.05, Energy Recovery, Inc. is trading near fair value based on current fundamentals. Our value factor score of 57/100 reflects a composite assessment across multiple valuation metrics including price-to-earnings, price-to-book, EV/EBITDA, and price-to-sales ratios relative to both sector peers and the broader market. Valuation metrics are mixed, with no strong signal of mispricing in either direction.

The stock currently trades at a P/E of 189.9x (a 754% premium to the sector median of 22.3x), EV/EBITDA of 58.7x (at a premium), P/B of 4.8x, P/S of 8.1x. The above-sector P/E multiple suggests the market is pricing in superior growth or quality, which our analysis partially supports given strong quality metrics.

We assign a Medium uncertainty rating to Energy Recovery, Inc.. The stock presents a balanced risk profile: current negative profitability (net margin -20.3%) and elevated valuation multiple (P/E 189.9x) that leaves limited margin for error. While not risk-free, the core business fundamentals are adequate to withstand moderate economic stress, and the range of potential outcomes around our fair value estimate is manageable.

Specific risk factors that inform our assessment include: current negative profitability (net margin -20.3%); elevated valuation multiple (P/E 189.9x) that leaves limited margin for error. Each of these factors independently widens the distribution of potential outcomes, and in combination they create a risk profile that demands careful position sizing. The stability factor at the 78th percentile and quality factor at the 63th percentile provide a quantitative summary of the overall risk landscape.

Key risk mitigants include: healthy gross margins of 62% provide a buffer against cost pressures; conservative leverage (16% D/E) limits balance sheet risk; above-average stability (78th percentile) suggests predictable business dynamics. These factors partially offset the identified risks and provide downside protection in adverse scenarios. On balance, the risk-reward profile is favorable for long-term investors.

We rate Energy Recovery, Inc.'s capital allocation as Poor. Key concerns include low returns on equity (2.5%), negative profitability. Exemplary capital allocators generate ROE above 20% and maintain conservative leverage — Energy Recovery, Inc. significantly underperforms these benchmarks, raising questions about management's ability to create shareholder value.

Investors should scrutinize management's reinvestment decisions and balance sheet trajectory before committing capital. Poor capital allocation often compounds over time: overlevered balance sheets limit strategic flexibility, while low returns on capital destroy shareholder value. We would need to see sustained improvement in profitability metrics and balance sheet discipline before considering an upgrade.

In summary, Energy Recovery, Inc. receives a Hold rating with a composite score of 56.2/100 (rank #1123 of 7,333). Our quantitative framework assigns a Narrow Moat (52/100, trend: stable), Medium uncertainty, and Poor capital allocation. The average factor score across quality, value, momentum, stability, and investment is 58/100.

Our analysis supports a neutral stance on Energy Recovery, Inc.. While the quantitative profile is not weak enough to warrant selling, it lacks the multi-factor strength required for a buy recommendation. Existing holders should maintain positions and monitor for catalysts — either fundamental improvement or valuation compression — that would shift the risk-reward balance.