Intrinsic value of Energy Recovery - ERII

Previous Close

$8.36

  Intrinsic Value

$73.89

stock screener

  Rating & Target

str. buy

+784%

Previous close

$8.36

 
Intrinsic value

$73.89

 
Up/down potential

+784%

 
Rating

str. buy

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

Revenue (in 0001), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 0.4

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   2
   3
   4
   5
   6
   7
   8
   9
   10
   11
   12
   13
   14
   15
   16
   17
   18
   19
   20
   21
   22
   23
   24
   25
   26
   27
   28
   29
   30
   31

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  49.20
  44.78
  40.80
  37.22
  34.00
  31.10
  28.49
  26.14
  24.03
  22.12
  20.41
  18.87
  17.48
  16.24
  15.11
  14.10
  13.19
  12.37
  11.63
  10.97
  10.37
  9.84
  9.35
  8.92
  8.53
  8.17
  7.86
  7.57
  7.31
  7.08
Revenue, $m
  94
  136
  192
  264
  353
  463
  595
  751
  931
  1,137
  1,369
  1,627
  1,912
  2,222
  2,558
  2,918
  3,303
  3,712
  4,144
  4,598
  5,075
  5,575
  6,096
  6,640
  7,206
  7,795
  8,407
  9,043
  9,705
  10,392
Variable operating expenses, $m
  62
  89
  125
  171
  229
  300
  385
  485
  602
  734
  883
  1,049
  1,232
  1,433
  1,649
  1,882
  2,130
  2,393
  2,672
  2,965
  3,272
  3,594
  3,930
  4,281
  4,646
  5,025
  5,420
  5,831
  6,257
  6,700
Fixed operating expenses, $m
  18
  19
  19
  20
  20
  21
  21
  21
  22
  22
  23
  23
  24
  24
  25
  25
  26
  27
  27
  28
  28
  29
  30
  30
  31
  32
  32
  33
  34
  35
Total operating expenses, $m
  80
  108
  144
  191
  249
  321
  406
  506
  624
  756
  906
  1,072
  1,256
  1,457
  1,674
  1,907
  2,156
  2,420
  2,699
  2,993
  3,300
  3,623
  3,960
  4,311
  4,677
  5,057
  5,452
  5,864
  6,291
  6,735
Operating income, $m
  14
  28
  48
  73
  104
  143
  189
  244
  307
  380
  463
  555
  655
  765
  884
  1,011
  1,147
  1,292
  1,445
  1,606
  1,775
  1,951
  2,136
  2,328
  2,529
  2,737
  2,954
  3,180
  3,414
  3,657
EBITDA, $m
  19
  35
  57
  85
  120
  163
  215
  277
  348
  429
  521
  623
  735
  858
  991
  1,133
  1,286
  1,448
  1,618
  1,798
  1,987
  2,185
  2,391
  2,607
  2,831
  3,064
  3,306
  3,558
  3,820
  4,093
Interest expense (income), $m
  0
  0
  2
  5
  8
  12
  18
  25
  33
  43
  54
  67
  81
  97
  115
  134
  155
  177
  201
  227
  254
  282
  312
  343
  375
  409
  444
  481
  519
  558
  599
Earnings before tax, $m
  14
  26
  43
  65
  92
  125
  164
  211
  265
  326
  397
  473
  558
  650
  749
  856
  970
  1,091
  1,218
  1,352
  1,493
  1,640
  1,793
  1,953
  2,120
  2,293
  2,474
  2,661
  2,856
  3,058
Tax expense, $m
  4
  7
  12
  17
  25
  34
  44
  57
  71
  88
  107
  128
  151
  176
  202
  231
  262
  294
  329
  365
  403
  443
  484
  527
  572
  619
  668
  718
  771
  826
Net income, $m
  10
  19
  31
  47
  67
  91
  120
  154
  193
  238
  290
  346
  407
  475
  547
  625
  708
  796
  889
  987
  1,090
  1,197
  1,309
  1,426
  1,548
  1,674
  1,806
  1,942
  2,085
  2,232

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $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 assets, $m
  141
  204
  288
  395
  529
  693
  891
  1,124
  1,393
  1,702
  2,049
  2,436
  2,862
  3,326
  3,829
  4,369
  4,945
  5,557
  6,203
  6,884
  7,598
  8,345
  9,126
  9,939
  10,787
  11,668
  12,585
  13,538
  14,528
  15,557
Adjusted assets (=assets-cash), $m
  141
  204
  288
  395
  529
  693
  891
  1,124
  1,393
  1,702
  2,049
  2,436
  2,862
  3,326
  3,829
  4,369
  4,945
  5,557
  6,203
  6,884
  7,598
  8,345
  9,126
  9,939
  10,787
  11,668
  12,585
  13,538
  14,528
  15,557
Revenue / Adjusted assets
  0.667
  0.667
  0.667
  0.668
  0.667
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
  0.668
Average production assets, $m
  27
  39
  56
  76
  102
  134
  172
  217
  269
  329
  396
  470
  552
  642
  739
  843
  955
  1,073
  1,198
  1,329
  1,467
  1,611
  1,762
  1,919
  2,082
  2,253
  2,430
  2,614
  2,805
  3,003
Working capital, $m
  -7
  -10
  -14
  -20
  -26
  -35
  -45
  -56
  -70
  -85
  -103
  -122
  -143
  -167
  -192
  -219
  -248
  -278
  -311
  -345
  -381
  -418
  -457
  -498
  -540
  -585
  -631
  -678
  -728
  -779
Total debt, $m
  36
  84
  149
  231
  334
  461
  612
  791
  999
  1,236
  1,503
  1,801
  2,128
  2,485
  2,872
  3,287
  3,730
  4,201
  4,698
  5,221
  5,770
  6,345
  6,945
  7,571
  8,223
  8,901
  9,605
  10,338
  11,099
  11,891
Total liabilities, $m
  108
  157
  221
  303
  407
  533
  685
  864
  1,072
  1,309
  1,576
  1,873
  2,201
  2,558
  2,944
  3,360
  3,803
  4,273
  4,770
  5,294
  5,843
  6,417
  7,018
  7,643
  8,295
  8,973
  9,678
  10,411
  11,172
  11,963
Total equity, $m
  33
  47
  66
  91
  122
  160
  206
  260
  322
  393
  473
  563
  661
  768
  884
  1,009
  1,142
  1,284
  1,433
  1,590
  1,755
  1,928
  2,108
  2,296
  2,492
  2,695
  2,907
  3,127
  3,356
  3,594
Total liabilities and equity, $m
  141
  204
  287
  394
  529
  693
  891
  1,124
  1,394
  1,702
  2,049
  2,436
  2,862
  3,326
  3,828
  4,369
  4,945
  5,557
  6,203
  6,884
  7,598
  8,345
  9,126
  9,939
  10,787
  11,668
  12,585
  13,538
  14,528
  15,557
Debt-to-equity ratio
  1.100
  1.790
  2.240
  2.530
  2.730
  2.880
  2.980
  3.050
  3.100
  3.140
  3.180
  3.200
  3.220
  3.230
  3.250
  3.260
  3.270
  3.270
  3.280
  3.280
  3.290
  3.290
  3.290
  3.300
  3.300
  3.300
  3.300
  3.310
  3.310
  3.310
Adjusted equity ratio
  0.231
  0.231
  0.231
  0.231
  0.231
  0.231
  0.231
  0.231
  0.231
  0.231
  0.231
  0.231
  0.231
  0.231
  0.231
  0.231
  0.231
  0.231
  0.231
  0.231
  0.231
  0.231
  0.231
  0.231
  0.231
  0.231
  0.231
  0.231
  0.231
  0.231

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  10
  19
  31
  47
  67
  91
  120
  154
  193
  238
  290
  346
  407
  475
  547
  625
  708
  796
  889
  987
  1,090
  1,197
  1,309
  1,426
  1,548
  1,674
  1,806
  1,942
  2,085
  2,232
Depreciation, amort., depletion, $m
  5
  7
  9
  12
  16
  21
  26
  33
  40
  49
  57
  68
  80
  93
  107
  122
  138
  155
  174
  193
  213
  233
  255
  278
  302
  326
  352
  379
  406
  435
Funds from operations, $m
  15
  26
  41
  60
  83
  112
  146
  187
  234
  287
  347
  414
  487
  568
  654
  747
  846
  952
  1,063
  1,180
  1,302
  1,431
  1,564
  1,704
  1,849
  2,001
  2,158
  2,321
  2,491
  2,668
Change in working capital, $m
  -2
  -3
  -4
  -5
  -7
  -8
  -10
  -12
  -14
  -15
  -17
  -19
  -21
  -23
  -25
  -27
  -29
  -31
  -32
  -34
  -36
  -37
  -39
  -41
  -42
  -44
  -46
  -48
  -50
  -52
Cash from operations, $m
  18
  29
  45
  65
  90
  120
  156
  198
  247
  303
  364
  433
  509
  591
  679
  774
  875
  982
  1,095
  1,214
  1,338
  1,468
  1,604
  1,745
  1,892
  2,045
  2,204
  2,369
  2,541
  2,719
Maintenance CAPEX, $m
  -3
  -4
  -6
  -8
  -11
  -15
  -19
  -25
  -31
  -39
  -48
  -57
  -68
  -80
  -93
  -107
  -122
  -138
  -155
  -174
  -193
  -213
  -233
  -255
  -278
  -302
  -326
  -352
  -379
  -406
New CAPEX, $m
  -9
  -12
  -16
  -21
  -26
  -32
  -38
  -45
  -52
  -60
  -67
  -75
  -82
  -90
  -97
  -104
  -111
  -118
  -125
  -131
  -138
  -144
  -151
  -157
  -164
  -170
  -177
  -184
  -191
  -199
Cash from investing activities, $m
  -12
  -16
  -22
  -29
  -37
  -47
  -57
  -70
  -83
  -99
  -115
  -132
  -150
  -170
  -190
  -211
  -233
  -256
  -280
  -305
  -331
  -357
  -384
  -412
  -442
  -472
  -503
  -536
  -570
  -605
Free cash flow, $m
  6
  13
  23
  36
  53
  73
  99
  128
  164
  204
  250
  301
  358
  421
  489
  563
  642
  726
  815
  909
  1,008
  1,111
  1,219
  1,332
  1,450
  1,573
  1,700
  1,833
  1,971
  2,114
Issuance/(repayment) of debt, $m
  36
  49
  64
  82
  103
  126
  152
  179
  208
  237
  267
  297
  327
  357
  387
  415
  443
  470
  497
  523
  549
  575
  600
  626
  652
  678
  705
  733
  761
  791
Issuance/(repurchase) of shares, $m
  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
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  37
  49
  64
  82
  103
  126
  152
  179
  208
  237
  267
  297
  327
  357
  387
  415
  443
  470
  497
  523
  549
  575
  600
  626
  652
  678
  705
  733
  761
  791
Total cash flow (excl. dividends), $m
  43
  62
  87
  119
  156
  200
  250
  308
  371
  441
  517
  599
  686
  778
  876
  978
  1,085
  1,196
  1,312
  1,432
  1,557
  1,686
  1,820
  1,958
  2,102
  2,251
  2,405
  2,566
  2,732
  2,905
Retained Cash Flow (-), $m
  -11
  -15
  -19
  -25
  -31
  -38
  -46
  -54
  -62
  -71
  -80
  -89
  -98
  -107
  -116
  -125
  -133
  -141
  -149
  -157
  -165
  -173
  -180
  -188
  -196
  -204
  -212
  -220
  -229
  -238
Prev. year cash balance distribution, $m
  70
  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
  102
  47
  68
  94
  125
  162
  205
  254
  309
  370
  437
  509
  587
  671
  760
  853
  952
  1,055
  1,163
  1,275
  1,392
  1,513
  1,639
  1,770
  1,906
  2,047
  2,194
  2,346
  2,503
  2,667
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
  98
  43
  59
  77
  97
  117
  138
  159
  177
  194
  207
  217
  223
  225
  223
  217
  207
  194
  179
  162
  144
  126
  107
  90
  74
  60
  47
  36
  27
  20
Current shareholders' claim on cash, %
  99.2
  99.2
  99.2
  99.2
  99.2
  99.2
  99.2
  99.2
  99.2
  99.2
  99.2
  99.2
  99.2
  99.2
  99.2
  99.2
  99.2
  99.2
  99.2
  99.2
  99.2
  99.2
  99.2
  99.2
  99.2
  99.2
  99.2
  99.2
  99.2
  99.2

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 444.4
Price to Sales 8.1
Price to Book 6.8
Price to Tangible Book
Price to Cash Flow 88.9
Price to Free Cash Flow 111.1
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 $63.156 million for the last fiscal year's total revenue generated by Energy Recovery. The default revenue input number comes from 0001 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 49.2% 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 66.7%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $18 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 5.4% 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 28.9%.

Life of production assets of 6.9 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 -7.5%. 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 - $91.894 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 53.595 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 $0.4 billion.

RELATED COMPANIES Price Int.Val. Rating
SLB Schlumberger 48.08 40.68  sell
FLS Flowserve 49.21 59.24  hold
WWD Woodward 81.57 77.69  hold
BWEN Broadwind Ener 1.80 0.73  str.sell
OPTT Ocean Power Te 0.530 0.14  str.sell

COMPANY NEWS

▶ Energy Recovery: 3Q Earnings Snapshot   [05:25PM  Associated Press]
▶ Who Really Owns Energy Recovery Inc (NASDAQ:ERII)?   [Oct-05-18 03:52PM  Simply Wall St.]
▶ Energy Recovery: 2Q Earnings Snapshot   [05:43PM  Associated Press]
▶ Energy Recovery: 1Q Earnings Snapshot   [May-03-18 05:37PM  Associated Press]
▶ Best Growth Stock in March   [Mar-30-18 12:02PM  Simply Wall St.]
▶ Energy Recovery Announces Share Repurchase Program   [Mar-08-18 09:00AM  PR Newswire]
▶ Energy Recovery misses 4Q revenue forecasts   [Mar-07-18 06:42PM  Associated Press]
▶ 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]

CONTACT US       ASSET ALLOCATION

About X-FIN       Site news       Privacy policy       Terms of use       FAQ

Copyright © X-FIN.com 2005-2018. All rigths reserved.