Aris Water (ARIS)

Water handling and recycling company Aris Water (NYSE:ARIS) reported Q1 CY2025 results exceeding the market’s revenue expectations, with sales up 16.5% year on year to $120.5 million. Its non-GAAP profit of $0.35 per share was 24% above analysts’ consensus estimates.

Company Overview

Primarily serving the oil and gas industry, Aris Water (NYSE:ARIS) is a provider of water handling and recycling solutions.

Many air and water services are statutorily mandated or non-discretionary. This means recurring revenues are often earned through contracts, making for more predictable top-line trends. Additionally, there has been an increasing focus on emissions and water conservation over the last decade, driving innovation in the sector and demand for new services. On the other hand, air and water services companies are at the whim of economic cycles. Interest rates, for example, can greatly impact manufacturing or industrial processes that drive incremental demand for these companies’ offerings.

Competitor of Aris Water include Evoqua Water Technologies (NYSE:AQUA), Pentair (NYSE:PNR), and Veralto (NYSE:VLTO).

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Thankfully, Aris Water’s 27.5% annualized revenue growth over the last four years was incredible. Its growth surpassed the average industrials company and shows its offerings resonate with customers, a great starting point for our analysis.

Long-term growth is the most important, but within industrials, a stretched historical view may miss new industry trends or demand cycles. Aris Water’s annualized revenue growth of 15.1% over the last two years is below its four-year trend, but we still think the results suggest healthy demand.

Aris Water also reports its number of units sold. Over the last two years, Aris Water’s units sold averaged 6.8% year-on-year growth. Because this number is lower than its revenue growth, we can see the company benefited from price increases.

This quarter, Aris Water reported year-on-year revenue growth of 16.5%, and its $120.5 million of revenue exceeded Wall Street’s estimates by 6.5%.

Looking ahead, sell-side analysts expect revenue to grow 8.7% over the next 12 months, a deceleration versus the last two years. Still, this projection is above average for the sector and implies the market is baking in some success for its newer products and services.

Aris Water has best-in-class unit economics for an industrials company, enabling it to invest in areas such as research and development. Its margin also signals it sells differentiated products, not commodities. As you can see below, it averaged an elite 55.7% gross margin over the last five years. That means Aris Water only paid its suppliers $44.31 for every $100 in revenue.

This quarter, Aris Water’s gross profit margin was 42%, marking a 20 percentage point decrease from 62% in the same quarter last year. Aris Water’s full-year margin has also been trending down over the past 12 months, decreasing by 3.2 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs (such as raw materials and manufacturing expenses).

Aris Water has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 17.2%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Aris Water’s operating margin rose by 16.6 percentage points over the last five years, as its sales growth gave it immense operating leverage.

In Q1, Aris Water generated an operating profit margin of 23.1%, down 3.8 percentage points year on year. Since Aris Water’s gross margin decreased more than its operating margin, we can assume its recent inefficiencies were driven more by weaker leverage on its cost of sales rather than increased marketing, R&D, and administrative overhead expenses.

Revenue trends explain a company’s historical growth, but the change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Aris Water’s EPS grew at an astounding 25.6% compounded annual growth rate over the last two years, higher than its 15.1% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into Aris Water’s quality of earnings can give us a better understanding of its performance. While we mentioned earlier that Aris Water’s operating margin declined this quarter, a two-year view shows its margin has expanded by 4.9 percentage points. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q1, Aris Water reported EPS at $0.35, up from $0.19 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Aris Water’s full-year EPS of $0.90 to grow 63.8%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Aris Water’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 4.4%, meaning it lit $4.43 of cash on fire for every $100 in revenue. This is a stark contrast from its operating margin, and its investments in working capital/capital expenditures are the primary culprit.

Taking a step back, an encouraging sign is that Aris Water’s margin expanded by 34.8 percentage points during that time. The company’s improvement shows it’s heading in the right direction, and continued increases could help it achieve long-term cash profitability.

Aris Water burned through $27.23 million of cash in Q1, equivalent to a negative 22.6% margin. The company’s cash flow turned negative after being positive in the same quarter last year, but we wouldn’t put too much weight on it because capital expenditures can be seasonal and companies often stockpile inventory in anticipation of higher demand, causing quarter-to-quarter swings. Long-term trends trump fluctuations.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Aris Water has shown solid business quality lately, it historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 5.8%, somewhat low compared to the best industrials companies that consistently pump out 20%+.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Aris Water’s ROIC has increased over the last few years. its rising ROIC is a good sign and could suggest its competitive advantage or profitable growth opportunities are expanding.

Aris Water reported $24.57 million of cash and $490.1 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $215.3 million of EBITDA over the last 12 months, we view Aris Water’s 2.2× net-debt-to-EBITDA ratio as safe. We also see its $19.91 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Aris Water blew past analysts’ revenue, EPS, and EBITDA expectations this quarter. On the other hand, its EBITDA guidance for next quarter missed. Still, we think this was a solid print. The stock traded up 1.8% to $25.91 immediately following the results.

Updated: May 16, 2025 at 10:05 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Aris Water.

Aris Water is truly a cream-of-the-crop industrials company. For starters, its revenue growth was exceptional over the last four years. And while its cash burn raises the question of whether it can sustainably maintain growth, its admirable gross margins indicate the mission-critical nature of its offerings. Additionally, Aris Water’s rising cash profitability gives it more optionality.

Aris Water’s P/E ratio based on the next 12 months is 15.6x. Looking at the industrials space today, Aris Water’s qualities as one of the best businesses really stand out, and we like it at this price.

Wall Street analysts have a consensus one-year price target of $30.34 on the company (compared to the current share price of $23.90), implying they see 26.9% upside in buying Aris Water in the short term.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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