metoo105 (30.91)

ERII - Part 2

November 18, 2010 – Comments (1) | RELATED TICKERS: ERII , FLS

Today, I read through the ERII patents and listened to the last quarterly conference call and went ahead and added it to the CAPS portfolio, largely so that I would not forget it and on the strength that it has fallen hard, has a fiver star CAPS rating, and has some recognizable catalysts like the reversal of the downtrend in new reverse osmosis desalination projects.

Right now, my tentative hypothesis is that ERII has some really useful technology and like many things the news on the tech is slow to filter into the world. From what I understand the at this point, the ceramics manufacturing may be a plus, and management is predicting that it will increase the gross margins. However, I am still worried that they might find that as they plainly state, "it's more art than science" and that it turns out to have many difficulties once they make the transition to in-house production.

More importantly, I looked up the US patents and read through most of them. More than half of them do not seem to be related to their product. The half that do can really be reduce to one that expires in 2015. This is not a lot of time for them to capture monopoly profits from their invention in my opinion. It seems that the business is being driven by this company with a widget mentailty when in fact it should be executed with a game-changing/disruptive-tech mentality. Perhaps I am overstating or failing to appreciate the dynamics here, but if the efficiency of the product is essentially like nearly doubling the water per energy input (actually it's an increase of 80%) then that means, in my mind, that they could charge nearly the same price that the pumps are charging, since they are effectively doubling the efficiency of the pumps. From the last quarterly conference call, it seems that pumps command about five times the price they are collecting.

As I understand it, the competition, Flowserve (FLS), makes a similar product with a dramatically lower efficiency gain. What am I failing to appreciate here?

ERII seems to have all of the components of a game-changer:

1. almost doubling the energy efficiency of water desalination, 

2. no moving parts so no maintenance.

I guess that this is a failure of the marketing and sales department to get the word out. Why is that pharma companies seem to have no problem getting the word out on a better mousetrap -- even when one hasn't actually been invented! -- whereas in the mechanical world, the patents expire before anyone can make a penny from the product. It's a very strange dichotomy.I can think of a dozen companies that have expired, but seemingly very valuable patents, that have taken nearly the entire twenty years to even get the ball rolling to an appreciable extent.