Energy Recovery, Inc. (ERII) stock intrinsic value fair value estimate & owner earnings analysis

Energy Recovery makes the PX Pressure Exchanger, a ceramic device that recovers pressure energy in reverse-osmosis desalination plants. Its Water segment was 99% of 2025 revenue of $135.0 million (2024: $144.9 million). Sales come through three channels. Megaprojects were $82.9 million, or 61%: large desalination plants that ship 16 to 36 months after contract. OEM equipment builders were $31.9 million. Aftermarket parts and service for the installed base were $20.2 million. About 98% of sales are outside the United States. In 2025 Saudi Arabia was 28% of product revenue and Qatar 12%, and two customers made up 14% and 12%. Because megaproject shipments are lumpy and cluster late in the year, results swing from quarter to quarter and year to year. Earnings history. Before 2021 the reported profits were flattered by the VorTeq licence. That licence revenue had been paid in advance, and the remaining $24.4 million was booked in one go when the licence ended in 2020. We treat that licence revenue as non-cash, which is why the company's cash earnings to owners before 2020 were roughly break-even. We measure the business from 2021, after the licence income ended. Cash earnings to owners come from operating cash flow less stock compensation and the capital spending needed to maintain the business. We strip out working-capital swings, and we count lease payments as a cash cost. On that basis they were $13.2 million in 2021, $27.2 million in 2022, $23.3 million in 2023, $26.7 million in 2024 and $25.9 million in 2025. The median is $25.9 million. Receivables climbed to $76.6 million at the end of 2025 because shipments are heavy in the fourth quarter, but they were collected down to $14.2 million by June 30, 2026. So we treat year-end receivables as timing, not as lost cash. What changed in 2026. On February 25, 2026 the company decided to wind down its CO2 refrigeration business for supermarkets (the PX G1300). It sat in the Emerging Technologies segment, which took 23% of 2025 operating expenses on only $0.3 million of revenue. The company expected $4.5 to $5.5 million of one-time wind-down costs, mostly non-cash. Second-quarter 2026 operating expenses were $14.8 million, including $0.9 million of restructuring, compared with $16.5 million a year earlier. That confirms the savings are real. Against this, first-half 2026 revenue fell to $21.7 million from $36.1 million, and second-quarter revenue fell to $12.0 million from $28.1 million, for a first-half net loss of $15.4 million. Inventory rose to $38.2 million from $24.3 million, which points to shipments later in the year. The quarterly report's explanation was not available to us, so we treat this as one weak quarter. It shapes 2026 but does not change our view of normal earnings. Interest income is also falling, to about $1.4 million in the first half, because cash has gone to buybacks: $35.6 million in 2025 and $20.7 million in the first half of 2026. Base case ($7.41 per share). 2026 cash earnings of about $21 million, reflecting the weak first half and the wind-down costs. After that, about $30 million a year: the $25.9 million median, less about $0.75 million of lost interest income, plus about $5 million after tax from the CO2 shutdown. We credit no market growth, because new desalination plant awards and share gains are not secured. That level is held for 20 years, based on the PX's long record in large desalination plants, where the company says it has been the industry standard for many years. It then fades to about $10 million by year 30, roughly what aftermarket sales to the installed base could sustain, and we stop there. Bull case ($9.40). $26 million in 2026, then $34 million a year. That is the stronger demonstrated years (2022 and 2024, about $27 million) plus the full cost savings. It is held for 25 years and then fades to $15 million by year 40. Bear case ($3.49). $15 million in 2026, if the second half also disappoints. Then $22 million in 2027, declining 4% a year through 2040, ending by 2045. The decline reflects risks the company names itself: competitors now sell similar devices, and gross margin fell from 66.9% to 65.1% in 2025 on pricing, mix and tariffs. It also reflects heavy dependence on a few Gulf and North African customers. Africa sales halved to $15.0 million in 2025. All cash flows are discounted at 6% on 51.5 million diluted shares. The company had no revolving-loan borrowings at the end of 2025, so leverage adds no extra risk. Its cash and investments ($48.1 million plus $35.2 million at year-end 2025) are counted only through the interest they earn, not added on top, which is conservative. What would prove this wrong: a lasting loss of megaproject share to cheaper competitors, or the 2026 revenue drop proving to be lost orders rather than timing.