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Company: Advanced Drainage Systems (WMS)
Business: Advanced Drainage Systems is simply a shaper of stormwater and onsite wastewater solutions. The institution and its subsidiary, Infiltrator Water Technologies, supply stormwater drainage and onsite wastewater products utilized successful a wide assortment of markets and applications, including commercial, residential, infrastructure and agriculture, portion delivering lawsuit service. Its tube conception manufactures and markets thermoplastic corrugated tube passim the United States. Its infiltrator conception is simply a supplier of integrative leachfield chambers and systems, septic tanks and accessories, chiefly for usage successful residential applications. Its planetary conception manufactures and markets products successful regions extracurricular the United States, with a strategy focused connected its owned facilities successful Canada and those markets serviced done its associated ventures successful Mexico and South America. Its Allied Products conception manufactures a scope of products which are complementary to their tube products.
Stock Market Value: : $11.98 cardinal ($144.10 per share)
Activist: Impactive Capital
Ownership: 2.14%
Average Cost: n/a
Activist Commentary: Impactive Capital is an activistic hedge money founded successful 2018 by Lauren Taylor Wolfe and Christian Alejandro Asmar. Impactive Capital is an progressive ESG capitalist that launched with a $250 cardinal concern from CalSTRS and present has astir $3 billion. In conscionable 7 years, they person made rather a sanction for themselves arsenic AESG investors. Wolfe and Asmar realized that determination was an accidental to usage tools, notably connected the societal and biology side, to thrust returns. Impactive focuses connected affirmative systemic alteration to assistance physique much competitive, sustainable businesses for the agelong run. Impactive volition usage accepted operational, fiscal and strategical tools that activists use, but volition besides instrumentality ESG alteration that they judge is worldly to the concern and drives profitability of the institution and shareholder value. Impactive looks for precocious prime businesses that are usually analyzable and mispriced, wherever they tin underwrite a minimum of a precocious teens oregon debased 20% interior complaint of instrumentality implicit a three- to five-year holding period, and person progressive engagement with absorption to acceptable up aggregate ways to win.
What's happening
On Oct. 21, Impactive said they had taken a presumption successful Advanced Drainage Systems.
Behind the scenes
Advanced Drainage Systems is the marketplace stock person successful integrative stormwater and onsite septic wastewater absorption solutions. The institution is simply a pioneer successful the improvement and manufacturing of integrative drainage products, chiefly utilizing high-density polyethylene (HDPE) and polypropylene. Recycled materials made up 46% of WMS' purchased inputs successful fiscal twelvemonth 2025, making it 1 of the largest recyclers successful North America. The institution has 3 superior concern lines: (i) Pipe - tempest and drainage pipe, 56% of FY25 revenue; (ii) Allied Products - complementary products to its tube offerings similar tempest chambers, structures and fittings, 26%; and (iii) Infiltrator - chambers, tanks and precocious wastewater attraction solutions, 18%. Between its 3 segments, the institution has a $15 cardinal addressable marketplace and is the wide manufacture person with 75% to 95% marketplace stock crossed its segments.
There is simply a batch to similar astir WMS, arsenic it is an highly high-quality and well-run institution with a agelong past of compounding maturation and secular tailwinds. As a result, WMS has an awesome way record, having grown net per stock astir 10x since its archetypal nationalist offering, and has a 28% EPS compound yearly maturation complaint with returns connected invested superior consistently supra 20%. Management is besides precise focused connected shareholder worth and are large superior allocators, expanding dividends and launching buybacks successful astir years wherever it does not spot a compelling M&A opportunity.
Despite this, the company's stock terms show has been lackluster implicit the past 1- and 3-year periods, underperforming the Russell 2000, and its banal has re-rated down to a P/E aggregate successful the low-to-mid 20s. The crushed for this is twofold: capitalist fears regarding the cyclicality of operation spending and borderline compression. However, Impactive Capital believes that some concerns look to beryllium overblown oregon misplaced and that absorption has built this concern to support its apical enactment from marketplace cyclicality and marque borderline enlargement structural, not cyclical.
As to the cyclicality of operation spending, operation spending is down 3% twelvemonth to day arsenic higher involvement rates and affordability concerns person dampened residential and non-residential operation spending, mounting this up to beryllium the worst twelvemonth for operation successful the past 2 decades speech from the planetary fiscal crisis. But institution gross has not been declining and is not expected to diminution for respective reasons.
First, integrative pipes person been stealing marketplace stock from factual and steel. Only astir 20% of the marketplace successful 2010, integrative present exceeds 40% owed to it being 20% cheaper than alternatives and offering superior performance.
Second, with the 2019 acquisition of Infiltrator and the upcoming acquisition of National Diversified Sales, WMS has accrued its vulnerability to the residential repair and remodel end-market, adding resiliency to its gross streams. This should besides marque WMS a earthy beneficiary of the reversion successful existing location sales, which are presently astatine a 15-year low.
Third, billion-dollar tempest events person quintupled since the 1980s, necessitating accrued concern successful resiliency and much analyzable stormwater infrastructure. The institution besides has a wide moat, enabled by its precocious marque loyalty from contractors, its vertical integration and fantabulous organisation network.
As for borderline concerns, determination are fears that weakness successful operation volition pb to borderline compression. However, this is thing other that absorption has taken a batch of steps and adopted galore initiatives to avoid. Over the past six years, the institution has been diversifying its concern toward its higher-margin Allied Product and Infiltrator offerings, some of which person adjusted operating margins successful the mid-50s, whereas tube is astir 30%.
Additionally, 1 of its largest input costs are lipid and resin, and WMS has a unsocial mode to mitigate these costs. The institution toggles betwixt recycled and virgin resins depending connected the terms of oil. So, erstwhile lipid spikes, they usage recycled resin, and erstwhile it drops, they power to virgin resin and seizure amended margins. WMS is the lone 1 of its competitors who tin bash this astatine scale. Moreover, erstwhile operation is weak, lipid and resin prices thin to decline. So, nonaccomplishment to the apical enactment tin beryllium made up connected the bottommost enactment arsenic the diminution successful resin prices is much than capable to offset end-market weaknesses (i.e., operation spending is down astir 3% YTD, resin prices are down 15% to 20%). As a result, tube and Allied Products adjusted EBITDA margins person expanded by astir 8 percent points since 2020, but immoderate fearfulness that this volition yet normalize.
However, Impactive believes that this displacement is structural, not cyclical and WMS volition not lone debar borderline compression but could spot gross borderline grow by 100 bps implicit the adjacent 12-24 months; thing that is not factored into guardant statement estimates.
As a effect of this confluence of factors, Impactive models that WMS volition instrumentality to mid-teens EPS maturation and projects a basal lawsuit three-year full instrumentality and IRR of 69% and 19%, respectively, and an upside lawsuit of 146% and 34%, respectively.
Ken Squire is the laminitis and president of 13D Monitor, an organization probe work connected shareholder activism, and the laminitis and portfolio manager of the 13D Activist Fund, a communal money that invests successful a portfolio of activistic investments.
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