photovs/iStock via Getty Images
photovs/iStock via Getty Images
Water is a force to be reckoned with. Whether it be stormwater threatening our lives or wastewater that needs to be contained and transported away, the element is powerful and important. And one company dedicated to helping deal with water is Advanced Drainage Systems ( NYSE:WMS ). In recent years, management has succeeded in growing the company at a rapid pace. That growth continues through the present day. As such, this high-quality enterprise is trading at levels that investors should definitely consider to be lofty. But within that price is the expectation that growth will continue moving forward. And so long as it does, shares probably are around the fair value point and could still be a reasonable prospect for long-term, patient investors.
Advanced Drainage Systems describes itself as a manufacturer of innovative water management solutions that is dedicated to both the stormwater and on-site septic wastewater industries. More specifically, the company provides drainage solutions for both the construction and agriculture markets, with these solutions including corrugated polypropylene and polyethylene pipes, plastic leach field chambers and systems, septic tanks, and accessories, miscellaneous water management products such as storm retention and detention chambers, septic chambers, fittings, water quality filters, and more. On top of all of this, it sells various products through resale agreements that include geotextile products, drainage grates, and more.
In its 2021 fiscal year, 53.1% of all revenue came from products that fell under the Pipe category. This was followed up by the company’s Allied Products & Other category at 22.3%. These particular products included the water management products already mentioned. The various chambers and systems, septic tanks, and related products, collectively called the Infiltrator category, accounted for 16.6% of sales. And then miscellaneous products from all of its operations that are sold internationally comprised the remaining 8%. In all, 93% of the company's sales are made to customers in the US. This is followed by Canada at 6% and other miscellaneous nations at 1% combined. In terms of the end markets for the company, 45% of sales or dedicated to non-residential customers. This is followed by residential customers at 39% and then infrastructure customers at 7%. Agricultural customers make up the remaining 9% of sales.
Author - SEC EDGAR Data
Author - SEC EDGAR Data
In recent years, management has done well to grow the business. Sales increased from $1.26 billion in 2017 to $1.98 billion in 2021. Despite the COVID-19 pandemic, revenue expansion from 2019 to 2020 was 20.9%. And growth from 2020 to 2021 stood at an impressive 18.5%. The great thing for investors is that that growth continues into the present day. In the first half of its 2022 fiscal year, for instance, the company generated sales of $1.38 billion. That is 30.7% higher than the $1.05 billion generated in the first half of 2021. For the full 2022 fiscal year, management believes that revenue will come in at between $2.55 billion and $2.65 billion. At the midpoint, that would imply a year-over-year expansion of 31.1%.
With the top line for the company rising, the bottom line has followed suit. Net profits grew from $33 million in 2017 to $224.2 million in 2021. The only year in which the company logged worse performance than the year prior was in 2020 when it booked a net loss of $193.2 million. Another profitability metric that has performed extremely well has been operating cash flow. This increased from $104.2 million in 2017 to $452.2 million in 2021. Even if we adjust for changes in working capital, growth would have been similar, taking the metric from $112.8 million to $431.5 million. And finally, we have EBITDA. According to management, this metric expanded from $193.4 million in 2017 to $567 million in 2021.
Author - SEC EDGAR Data
Author - SEC EDGAR Data
Just as revenue growth has continued into the current fiscal year, the same can be said of profitability growth. But it is worth noting that margins have contracted some this year, resulting in the increase in profitability being marginal by comparison. For instance, net profits have increased by just 0.4% in the first half of 2022, rising from $150.7 million to $151.3 million. Operating cash flow actually contracted, falling from $286.2 million to $94.9 million. But if we adjust for changes in working capital, it would have risen by 5.1% from $247 million to $259.6 million. Meanwhile, EBITDA managed to decline slightly, dropping from $333.5 million to $331.4 million.
Author - SEC EDGAR Data
Author - SEC EDGAR Data
For the full 2022 fiscal year, management expects EBITDA to range from between $635 million and $665 million, with a midpoint of $650 million. No other profitability guidance was provided. But if we assume a similar year-over-year growth rate for profits and operating cash flow, then these figures should be around $257 million and $495 million, respectively. this allows us to effectively price the company. On a price-to-earnings basis, for instance, the company is trading at a multiple of 35.6. This compares to the 40.8 reading we get if we rely on the 2021 data. Its price to operating cash flow multiple is 18.5, down from the 21.2 we get if we rely on 2021 figures. And its EV to EBITDA multiple stands at 15.5. That compares to the 17.8 reading we get if we rely on the 2021 data.
To put this pricing in perspective, I decided to compare the company to five other similar firms as picked out from Seeking Alpha’s Quant platform. On a price-to-earnings basis, these companies ranged from a low of 3 to a high of 31.7. Our prospect was the most expensive of the group. On a price to operating cash flow basis, the range was 8.1 to 20.9. And on an EV to EBITDA basis, the range was 3 to 15.9. In both of these cases, four of the five companies were cheaper than Advanced Drainage Systems.
Based on the data provided, I have the utmost confidence in management's ability to continue growing Advanced Drainage Systems at a nice pace for the foreseeable future. It seems like the market believes similarly, hence the high trading multiples the business is going for. If growth does slow or even retreat, there's a real chance that shares could be hit. But for investors who believe that growth will continue for the next couple of years, shares are priced at levels that should probably be considered reasonable.
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This article was written by
Daniel is currently the manager of Avaring Capital Advisors, LLC, a registered investment advisor that oversees one hedge fund, and he runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.