Intrinsic value of Energy Recovery - ERII

Previous Close

$8.81

  Intrinsic Value

$0.24

stock screener

  Rating & Target

str. sell

-97%

Previous close

$8.81

 
Intrinsic value

$0.24

 
Up/down potential

-97%

 
Rating

str. sell

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of ERII stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Shares outstanding, mln

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  22.22
  25.00
  23.00
  21.20
  19.58
  18.12
  16.81
  15.63
  14.57
  13.61
  12.75
  11.97
  11.28
  10.65
  10.08
  9.58
  9.12
  8.71
  8.34
  8.00
  7.70
  7.43
  7.19
  6.97
  6.77
  6.60
  6.44
  6.29
  6.16
  6.05
  5.94
Revenue, $m
  55
  69
  85
  102
  123
  145
  169
  196
  224
  254
  287
  321
  358
  396
  435
  477
  521
  566
  613
  662
  713
  766
  821
  879
  938
  1,000
  1,064
  1,131
  1,201
  1,274
  1,349
Variable operating expenses, $m
 
  87
  107
  129
  154
  182
  213
  246
  281
  319
  360
  401
  447
  494
  544
  596
  651
  707
  766
  827
  891
  957
  1,026
  1,098
  1,172
  1,249
  1,330
  1,413
  1,501
  1,591
  1,686
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  54
  87
  107
  129
  154
  182
  213
  246
  281
  319
  360
  401
  447
  494
  544
  596
  651
  707
  766
  827
  891
  957
  1,026
  1,098
  1,172
  1,249
  1,330
  1,413
  1,501
  1,591
  1,686
Operating income, $m
  0
  -18
  -22
  -27
  -32
  -37
  -43
  -50
  -57
  -65
  -73
  -80
  -89
  -99
  -109
  -119
  -130
  -141
  -153
  -165
  -178
  -191
  -205
  -219
  -234
  -249
  -265
  -282
  -300
  -318
  -336
EBITDA, $m
  4
  -15
  -18
  -22
  -26
  -31
  -36
  -42
  -48
  -54
  -61
  -69
  -76
  -85
  -93
  -102
  -111
  -121
  -131
  -142
  -153
  -164
  -176
  -188
  -201
  -214
  -228
  -242
  -257
  -272
  -289
Interest expense (income), $m
  0
  0
  -1
  -1
  0
  1
  1
  2
  3
  3
  4
  5
  6
  7
  8
  9
  10
  12
  13
  14
  16
  17
  19
  20
  22
  23
  25
  27
  29
  31
  33
Earnings before tax, $m
  1
  -18
  -21
  -26
  -32
  -38
  -45
  -52
  -60
  -68
  -77
  -85
  -95
  -106
  -117
  -128
  -140
  -153
  -166
  -179
  -194
  -208
  -223
  -239
  -256
  -273
  -291
  -309
  -328
  -348
  -369
Tax expense, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Net income, $m
  1
  -18
  -21
  -26
  -32
  -38
  -45
  -52
  -60
  -68
  -77
  -85
  -95
  -106
  -117
  -128
  -140
  -153
  -166
  -179
  -194
  -208
  -223
  -239
  -256
  -273
  -291
  -309
  -328
  -348
  -369

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  100
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  149
  61
  75
  91
  109
  129
  151
  174
  200
  227
  256
  286
  319
  353
  388
  425
  464
  504
  547
  590
  636
  683
  732
  783
  836
  891
  949
  1,008
  1,070
  1,135
  1,203
Adjusted assets (=assets-cash), $m
  49
  61
  75
  91
  109
  129
  151
  174
  200
  227
  256
  286
  319
  353
  388
  425
  464
  504
  547
  590
  636
  683
  732
  783
  836
  891
  949
  1,008
  1,070
  1,135
  1,203
Revenue / Adjusted assets
  1.122
  1.131
  1.133
  1.121
  1.128
  1.124
  1.119
  1.126
  1.120
  1.119
  1.121
  1.122
  1.122
  1.122
  1.121
  1.122
  1.123
  1.123
  1.121
  1.122
  1.121
  1.122
  1.122
  1.123
  1.122
  1.122
  1.121
  1.122
  1.122
  1.122
  1.121
Average production assets, $m
  13
  16
  19
  23
  28
  33
  38
  44
  51
  58
  65
  73
  81
  90
  99
  108
  118
  128
  139
  150
  162
  174
  186
  199
  213
  227
  242
  257
  273
  289
  306
Working capital, $m
  105
  6
  8
  9
  11
  13
  15
  18
  20
  23
  26
  29
  33
  36
  40
  43
  47
  52
  56
  60
  65
  70
  75
  80
  85
  91
  97
  103
  109
  116
  123
Total debt, $m
  0
  -29
  -16
  -2
  14
  32
  52
  73
  96
  120
  146
  174
  203
  233
  265
  299
  334
  370
  408
  447
  488
  531
  575
  621
  669
  718
  770
  823
  879
  938
  998
Total liabilities, $m
  84
  55
  68
  82
  98
  116
  136
  157
  180
  204
  230
  258
  287
  317
  349
  383
  418
  454
  492
  531
  572
  615
  659
  705
  753
  802
  854
  907
  963
  1,022
  1,082
Total equity, $m
  65
  6
  8
  9
  11
  13
  15
  17
  20
  23
  26
  29
  32
  35
  39
  43
  46
  50
  55
  59
  64
  68
  73
  78
  84
  89
  95
  101
  107
  114
  120
Total liabilities and equity, $m
  149
  61
  76
  91
  109
  129
  151
  174
  200
  227
  256
  287
  319
  352
  388
  426
  464
  504
  547
  590
  636
  683
  732
  783
  837
  891
  949
  1,008
  1,070
  1,136
  1,202
Debt-to-equity ratio
  0.000
  -4.710
  -2.150
  -0.200
  1.310
  2.490
  3.430
  4.180
  4.790
  5.300
  5.720
  6.070
  6.360
  6.620
  6.840
  7.020
  7.190
  7.330
  7.460
  7.580
  7.680
  7.770
  7.850
  7.930
  8.000
  8.060
  8.110
  8.170
  8.220
  8.260
  8.300
Adjusted equity ratio
  -0.714
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  1
  -18
  -21
  -26
  -32
  -38
  -45
  -52
  -60
  -68
  -77
  -85
  -95
  -106
  -117
  -128
  -140
  -153
  -166
  -179
  -194
  -208
  -223
  -239
  -256
  -273
  -291
  -309
  -328
  -348
  -369
Depreciation, amort., depletion, $m
  4
  4
  4
  5
  6
  6
  7
  8
  9
  10
  11
  11
  13
  14
  15
  17
  18
  20
  22
  23
  25
  27
  29
  31
  33
  35
  38
  40
  43
  45
  48
Funds from operations, $m
  3
  -15
  -17
  -21
  -26
  -31
  -37
  -44
  -50
  -58
  -66
  -74
  -83
  -92
  -101
  -111
  -122
  -133
  -144
  -156
  -168
  -181
  -194
  -208
  -222
  -237
  -253
  -269
  -286
  -303
  -321
Change in working capital, $m
  -2
  1
  1
  2
  2
  2
  2
  2
  3
  3
  3
  3
  3
  3
  4
  4
  4
  4
  4
  4
  5
  5
  5
  5
  5
  6
  6
  6
  6
  7
  7
Cash from operations, $m
  5
  -16
  -19
  -23
  -28
  -33
  -40
  -46
  -53
  -61
  -69
  -77
  -86
  -95
  -105
  -115
  -126
  -137
  -148
  -160
  -173
  -186
  -199
  -213
  -228
  -243
  -259
  -275
  -292
  -310
  -328
Maintenance CAPEX, $m
  0
  -2
  -2
  -3
  -4
  -4
  -5
  -6
  -7
  -8
  -9
  -10
  -11
  -13
  -14
  -15
  -17
  -18
  -20
  -22
  -23
  -25
  -27
  -29
  -31
  -33
  -35
  -38
  -40
  -43
  -45
New CAPEX, $m
  -1
  -3
  -4
  -4
  -5
  -5
  -6
  -6
  -6
  -7
  -7
  -8
  -8
  -9
  -9
  -9
  -10
  -10
  -11
  -11
  -12
  -12
  -13
  -13
  -14
  -14
  -15
  -15
  -16
  -16
  -17
Cash from investing activities, $m
  -41
  -5
  -6
  -7
  -9
  -9
  -11
  -12
  -13
  -15
  -16
  -18
  -19
  -22
  -23
  -24
  -27
  -28
  -31
  -33
  -35
  -37
  -40
  -42
  -45
  -47
  -50
  -53
  -56
  -59
  -62
Free cash flow, $m
  -36
  -21
  -25
  -30
  -36
  -43
  -50
  -58
  -66
  -75
  -85
  -95
  -105
  -117
  -128
  -140
  -153
  -166
  -179
  -193
  -208
  -223
  -239
  -255
  -272
  -290
  -309
  -328
  -348
  -369
  -391
Issuance/(repayment) of debt, $m
  0
  -29
  13
  14
  16
  18
  20
  21
  23
  24
  26
  28
  29
  31
  32
  33
  35
  36
  38
  39
  41
  43
  44
  46
  48
  50
  52
  54
  56
  58
  61
Issuance/(repurchase) of shares, $m
  -3
  60
  23
  28
  34
  40
  47
  54
  62
  71
  80
  88
  98
  109
  120
  132
  144
  157
  170
  184
  198
  213
  228
  244
  261
  278
  296
  315
  335
  355
  376
Cash from financing (excl. dividends), $m  
  -3
  31
  36
  42
  50
  58
  67
  75
  85
  95
  106
  116
  127
  140
  152
  165
  179
  193
  208
  223
  239
  256
  272
  290
  309
  328
  348
  369
  391
  413
  437
Total cash flow (excl. dividends), $m
  -39
  10
  11
  12
  14
  15
  16
  17
  19
  20
  21
  21
  22
  23
  24
  25
  26
  28
  29
  30
  31
  32
  34
  35
  36
  38
  39
  41
  42
  44
  46
Retained Cash Flow (-), $m
  -1
  -60
  -23
  -28
  -34
  -40
  -47
  -54
  -62
  -71
  -80
  -88
  -98
  -109
  -120
  -132
  -144
  -157
  -170
  -184
  -198
  -213
  -228
  -244
  -261
  -278
  -296
  -315
  -335
  -355
  -376
Prev. year cash balance distribution, $m
 
  100
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  50
  -12
  -16
  -20
  -25
  -31
  -37
  -44
  -51
  -59
  -67
  -76
  -86
  -96
  -107
  -118
  -129
  -141
  -154
  -167
  -181
  -195
  -209
  -225
  -241
  -257
  -274
  -292
  -311
  -330
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  48
  -11
  -14
  -17
  -19
  -22
  -25
  -27
  -29
  -31
  -32
  -33
  -33
  -32
  -31
  -30
  -28
  -26
  -24
  -21
  -19
  -16
  -14
  -11
  -9
  -8
  -6
  -5
  -3
  -2
Current shareholders' claim on cash, %
  100
  50.0
  33.3
  22.2
  14.8
  9.9
  6.7
  4.5
  3.0
  2.1
  1.4
  0.9
  0.6
  0.4
  0.3
  0.2
  0.1
  0.1
  0.1
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0

Energy Recovery, Inc. 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. Its segments include Water, Oil & Gas, and Corporate. The Water Segment focuses on products sold for use in reverse osmosis water desalination. The Oil & Gas Segment consists of products sold for use in hydraulic fracturing, gas processing, and chemical processing. The Company offers energy recovery devices (ERDs) in the water desalination market with its pressure exchanger (PX) and turbocharger technologies. The Company offers VorTeq hydraulic fracturing system, IsoBoost, and IsoGen product lines to the oil and gas market. The Company's customers include engineering, procurement and construction companies, original equipment manufacturers, international oil companies, national oil companies, and exploration and production companies.

FINANCIAL RATIOS  of  Energy Recovery (ERII)

Valuation Ratios
P/E Ratio 468.3
Price to Sales 8.5
Price to Book 7.2
Price to Tangible Book
Price to Cash Flow 93.7
Price to Free Cash Flow 117.1
Growth Rates
Sales Growth Rate 22.2%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 0%
Cap. Spend. - 3 Yr. Gr. Rate 0%
Financial Strength
Quick Ratio NaN
Current Ratio 0.1
LT Debt to Equity 0%
Total Debt to Equity 0%
Interest Coverage 0
Management Effectiveness
Return On Assets 0.7%
Ret/ On Assets - 3 Yr. Avg. -9.9%
Return On Total Capital 1.6%
Ret/ On T. Cap. - 3 Yr. Avg. -13.5%
Return On Equity 1.6%
Return On Equity - 3 Yr. Avg. -13.5%
Asset Turnover 0.4
Profitability Ratios
Gross Margin 67.3%
Gross Margin - 3 Yr. Avg. 60.6%
EBITDA Margin 9.1%
EBITDA Margin - 3 Yr. Avg. -18.5%
Operating Margin 1.8%
Oper. Margin - 3 Yr. Avg. -29.4%
Pre-Tax Margin 1.8%
Pre-Tax Margin - 3 Yr. Avg. -28.3%
Net Profit Margin 1.8%
Net Profit Margin - 3 Yr. Avg. -29.4%
Effective Tax Rate 0%
Eff/ Tax Rate - 3 Yr. Avg. -1.9%
Payout Ratio 0%

ERII stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the ERII stock intrinsic value calculation we used $55 million for the last fiscal year's total revenue generated by Energy Recovery. The default revenue input number comes from 2016 income statement of Energy Recovery. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our ERII stock valuation model: a) initial revenue growth rate of 25% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for ERII is calculated based on our internal credit rating of Energy Recovery, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Energy Recovery.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of ERII stock the variable cost ratio is equal to 127.3%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for ERII stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Energy Recovery.

Corporate tax rate of 27% is the nominal tax rate for Energy Recovery. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the ERII stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for ERII are equal to 22.7%.

Life of production assets of 6.4 years is the average useful life of capital assets used in Energy Recovery operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for ERII is equal to 9.1%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $65 million for Energy Recovery - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 54.697 million for Energy Recovery is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Energy Recovery at the current share price and the inputted number of shares is $0.5 billion.

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COMPANY NEWS

▶ Energy Recovery beats 3Q profit forecasts   [Nov-01-17 06:40PM  Associated Press]
▶ [$$] Stocks to Play an Oil Breakout   [Sep-22-17 02:03PM  Barrons.com]
▶ Energy Recovery reports 2Q loss   [Aug-02-17 10:59PM  Associated Press]
▶ Energy Recovery reports 1Q loss   [May-03-17 05:24PM  Associated Press]
▶ Energy Recovery Announces Share Repurchase Program   [Mar-30-17 08:00AM  PR Newswire]
▶ Energy Recovery, Inc. (ERII) Hedge Funds Are Snapping Up   [Dec-09-16 08:59AM  at Insider Monkey]
▶ Why Energy Recovery, Inc. Stock Dropped 15%   [12:27PM  at Motley Fool]
▶ Trades Setting Up in These Volatile Stocks   [Oct-24-16 01:00PM  at Investopedia]
Financial statements of ERII
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