Company: Advanced Drainage Systems (WMS)
Business: Advanced Drainage Systems is a manufacturer of stormwater and onsite wastewater solutions. The company and its subsidiary, Infiltrator Water Technologies, provide stormwater drainage and onsite wastewater products used in a wide variety of markets and applications, including commercial, residential, infrastructure and agriculture, while delivering customer service. Its pipe segment manufactures and markets thermoplastic corrugated pipe throughout the United States. Its infiltrator segment is a provider of plastic leachfield chambers and systems, septic tanks and accessories, primarily for use in residential applications. Its international segment manufactures and markets products in regions outside the United States, with a strategy focused on its owned facilities in Canada and those markets serviced through its joint ventures in Mexico and South America. Its Allied Products segment manufactures a range of products which are complementary to their pipe products.
Stock Market Value: : $11.98 billion ($144.10 per share)
Activist: Impactive Capital
Ownership: 2.14%
Average Cost: n/a
Activist Commentary: Impactive Capital is an activist hedge fund founded in 2018 by Lauren Taylor Wolfe and Christian Alejandro Asmar. Impactive Capital is an active ESG investor that launched with a $250 million investment from CalSTRS and now has approximately $3 billion. In just seven years, they have made quite a name for themselves as AESG investors. Wolfe and Asmar realized that there was an opportunity to use tools, notably on the social and environmental side, to drive returns. Impactive focuses on positive systemic change to help build more competitive, sustainable businesses for the long run. Impactive will use traditional operational, financial and strategic tools that activists use, but will also implement ESG change that they believe is material to the business and drives profitability of the company and shareholder value. Impactive looks for high quality businesses that are usually complex and mispriced, where they can underwrite a minimum of a high teens or low 20% internal rate of return over a three- to five-year holding period, and have active engagement with management to set up multiple ways to win.
What’s happening
On Oct. 21, Impactive said they had taken a position in Advanced Drainage Systems.
Behind the scenes
Advanced Drainage Systems is the market share leader in plastic stormwater and onsite septic wastewater management solutions. The company is a pioneer in the development and manufacturing of plastic drainage products, primarily utilizing high-density polyethylene (HDPE) and polypropylene. Recycled materials made up 46% of WMS’ purchased inputs in fiscal year 2025, making it one of the largest recyclers in North America. The company has three primary business lines: (i) Pipe – storm and drainage pipe, 56% of FY25 revenue; (ii) Allied Products – complementary products to its pipe offerings like storm chambers, structures and fittings, 26%; and (iii) Infiltrator – chambers, tanks and advanced wastewater treatment solutions, 18%. Between its three segments, the company has a $15 billion addressable market and is the clear industry leader with 75% to 95% market share across its segments.
There is a lot to like about WMS, as it is an extremely high-quality and well-run company with a long history of compounding growth and secular tailwinds. As a result, WMS has an impressive track record, having grown earnings per share almost 10x since its initial public offering, and has a 28% EPS compound annual growth rate with returns on invested capital consistently above 20%. Management is also very focused on shareholder value and are great capital allocators, increasing dividends and launching buybacks in most years where it does not see a compelling M&A opportunity.
Despite this, the company’s share price performance has been lackluster over the past 1- and 3-year periods, underperforming the Russell 2000, and its stock has re-rated down to a P/E multiple in the low-to-mid 20s. The reason for this is twofold: investor fears regarding the cyclicality of construction spending and margin compression. However, Impactive Capital believes that both concerns appear to be overblown or misplaced and that management has built this business to protect its top line from market cyclicality and make margin expansion structural, not cyclical.
As to the cyclicality of construction spending, construction spending is down 3% year to date as higher interest rates and affordability concerns have dampened residential and non-residential construction spending, setting this up to be the worst year for construction in the past two decades aside from the global financial crisis. But company revenue has not been declining and is not expected to decline for several reasons.
First, plastic pipes have been stealing market share from concrete and steel. Only about 20% of the market in 2010, plastic now exceeds 40% due 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 increased its exposure to the residential repair and remodel end-market, adding resiliency to its revenue streams. This should also make WMS a natural beneficiary of the reversion in existing home sales, which are currently at a 15-year low.
Third, billion-dollar storm events have quintupled since the 1980s, necessitating increased investment in resiliency and more complex stormwater infrastructure. The company also has a wide moat, enabled by its high brand loyalty from contractors, its vertical integration and excellent distribution network.
As for margin concerns, there are fears that weakness in construction will lead to margin compression. However, this is something else that management has taken a lot of steps and adopted many initiatives to avoid. Over the past six years, the company has been diversifying its business toward its higher-margin Allied Product and Infiltrator offerings, both of which have adjusted operating margins in the mid-50s, whereas pipe is around 30%.
Additionally, one of its largest input costs are oil and resin, and WMS has a unique way to mitigate these costs. The company toggles between recycled and virgin resins depending on the price of oil. So, when oil spikes, they use recycled resin, and when it drops, they switch to virgin resin and capture better margins. WMS is the only one of its competitors who can do this at scale. Moreover, when construction is weak, oil and resin prices tend to decline. So, loss to the top line can be made up on the bottom line as the decline in resin prices is more than enough to offset end-market weaknesses (i.e., construction spending is down about 3% YTD, resin prices are down 15% to 20%). As a result, pipe and Allied Products adjusted EBITDA margins have expanded by about 8 percentage points since 2020, but some fear that this will eventually normalize.
However, Impactive believes that this shift is structural, not cyclical and WMS will not only avoid margin compression but could see gross margin expand by 100 bps over the next 12-24 months; something that is not factored into forward consensus estimates.
As a result of this confluence of factors, Impactive models that WMS will return to mid-teens EPS growth and projects a base case three-year total return and IRR of 69% and 19%, respectively, and an upside case of 146% and 34%, respectively.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist investments.
