Why Energy Recovery, Inc. Stock Dropped 15%

Desalination should be a big business for Energy Recovery, Inc., but so far, it's not showing up in the revenues. Image source: Getty Images.

What happened

Energy Recovery (NASDAQ: ERII) manufactures industrial equipment for the fracking and desalination industries -- two areas that you'd expect to be growing briskly in the modern environment of water shortages, and an energy industry reliant on fracking for oil and gas production. Unfortunately, things aren't working out quite as planned.

Last night, Energy Recovery reported third-quarter earnings featuring only 1% growth in sales and no profits whatsoever on those sales (actually, a $0.01-per-share loss). The results caught Wall Street off guard, where analysts had been predicting a $0.06-per-share profitfor Energy Recovery stock -- and sent Energy Recovery shares plummeting. As of 10:45 a.m. EDT on Thursday, Energy Recovery shares were down 14.9%.

So what

Management continues to boast of its "record gross profit margins," even as on the bottom line, its net income continues to disappoint. In fact, this is the third time in the past four quartersthat Energy Recovery has delivered a negative earnings surprise, and investors appear to be getting tired of the repetition.

Worse, Wall Street has been telling investors to expect $0.67 per share in full-year earnings out of Energy Recovery this year -- a target that's getting increasingly hard to hit as the company repeatedly misses earnings.

Now what

Current estimates call for Energy Recovery to earn $0.43 per share in its fourth and final quarter of the year, so a lot's going to be riding on Energy Recovery's performance in Q4. Management, however, gave no guidance in its earnings report, and so no reassurance that it will hit Wall Street's target.

If investors are getting nervous and abandoning the stock today, you can hardly blame them.

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Fool contributorRich Smithdoes not own shares of, nor is he short, any company named above. You can find him onMotley Fool CAPS, publicly pontificating under the handleTMFDitty, where he currently ranks No. 333 out of more than 75,000 rated members.

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