The Company With An Innovative Solution To The Water Crisis

I grew up on a family farm in North Central Kansas. And though I moved away to the big city long ago, the farm has always been home. It’s among my favorite places.

Farming is tough work and ridiculously capital-intensive. It takes millions of dollars’ worth of land and millions more in equipment to launch even a modest agricultural operation. There are no guarantees, and all of the critical success factors are completely out of the farmer’s control.

#-ad_banner-#Last year, we intended to harvest the wheat that we planted in half the county. In a good year, our ground yields roughly $200 profit per acre, leaving enough to pay for some equipment, make a little progress on any land debt and put a few bucks in the bank.

Now, the trouble with that paragraph is the phrase “in a good year.” I hate to be the bearer of bad news, but “good” years have been rare of late, primarily because of a persistent drought that has put a relentless stranglehold on the Bread Basket.

Conditions were so poor last year that we didn’t have a crop to cut. Spring never seemed to come, and the wheat failed. It was a total loss, something like that happens every 25 years or so. Insurance stanches the bleeding, but it only limits losses, and it can take years to recover — presuming it eventually rains.

But things are even worse in California.

The governor declared a state of emergency in January, and lawmakers are also working on a billion-dollar aid package. Remember, for all the talk about high-tech companies in the Golden State, agriculture is still a major industry. It brings in $44 billion a year and uses — get this — 80% of the state’s water.

California crops supply a quarter of the U.S. food supply. Without agriculture, California has enough water to supply 350 million people, a crowd greater than the population of the entire country.

This got me to thinking.

Consider these three facts:

1. California has more people than locally available water resources can support.

2. The region is in the throes of a serious long-term drought.

3. The place sits next to the largest body of water on the planet. A possible solution for the problem almost seems too obvious: Take the salt out of the damn seawater.

Well, that’s happening.

Desalination, which had been the province of Middle Eastern countries and cruise ships, has now worked itself into the California water resources plan.

Construction crews in San Diego County are putting the finishing touches on a $1 billion desalination plant that will be the largest in the Western Hemisphere, able to cleanse 50 million gallons of seawater every 24 hours.

Huntington Beach is planning a desalination facility for Orange County. A desal project in Santa Barbara that had been abandoned is looking like it might be restarted and completed. In all, dozens of California municipalities are looking at the technology, as are communities in Texas and Florida.

Desalination, which has been around for years, is a pricey solution, but it works. In San Diego County, for example, water bills average about $75 a month. The new desalination plant will push that up by about five bucks. Even setting aside cost, the plants are not without opposition.

But given that crops need irrigation, tens of millions of people require adequate supplies for drinking and everyday living and the additional demands from industry, the prospect of even pricey water sounds pretty good.

That’s where my one of my recent Game-Changing Stocks recommendations comes in.

Energy Recovery (Nasdaq: ERII) is a company that manufacturers a unique piece of equipment that decreases a desal plant’s electricity usage by half. It’s called the “Pressure Exchanger,” and it’s a remarkably simple piece of equipment. It only has one moving part (and, as such, requires no maintenance).

To envision how it works, you have to imagine what a desal plant does. Don’t worry, it’s not hard: Basically, it’s a high-pressure nozzle that shoots water at a filter. The water that goes through the filter is clean. The water that doesn’t make it through the filter, however, sort of bounces back. As it does, the Pressure Exchanger catches it, and conserving its momentum, it loops the water back around into a low-pressure stream. That shoots it through another filter, and voila, almost no energy is lost. The Pressure Exchanger is 97.2% efficient.

Energy Recovery is a leading manufacturer of this type of equipment. It’s been installed more than 15,000 times in hundreds of plants all around the world, leading to $1.4 billion in electricity cost savings each year and providing three billion gallons of clean drinking water every day for people who otherwise wouldn’t have it.

As Californians turn to desalination to source their increasingly scarce drinking water, Energy Recovery is likely to see a bump in domestic sales, which has the potential to not only increase the company’s top-line revenue number, but also kick it into the black. Such a glowing success on the income statement would nicely complement the company’s strong, debt-free balance sheet and, one hopes, translate to a higher share price.

Desalination strikes me as being obvious. Californians, or at least policymakers there, are ready to embrace any solution to the drought. Part and parcel of any desal solution is equipment from Energy Recovery. Shares would be a great pickup for an aggressive growth portfolio at any price under $3.50. Plan on holding to $5-to-$6, a price I think this stock can achieve in 2015.

P.S. — Water desalination is just one of many groundbreaking trends that I’ve led readers to. My latest Game-Changing Stocks research details the little-known companies behind Apple’s latest innovation. These firms have already seen significant share price gains, but I believe that this is only the beginning, as Apple is seemingly a juggernaut that cannot be stopped. If you’d like to read more about the secrets behind Apple’s success and the suppliers that are profiting as a result, then please click here.