Advanced Drainage Systems (WMS) Is Up 6.3% Today - Is It Still an Opportunity?

Advanced Drainage Systems (WMS) stock climbed 6.3 % this afternoon. According to our metrics, the company seems overvalued at today's prices. In the below analysis, we will put Advanced Drainage Systems's valuation in the context of its mixed growth prospects and positive market sentiment, which are also strong drivers for share price.

Advanced Drainage Systems, Inc. designs, manufactures, and markets thermoplastic corrugated pipes and related water management products, and drainage solutions for use in the underground construction and infrastructure marketplace in the United States, Canada, Mexico, and internationally. The large-cap Industrials company is based in Hilliard, United States and has 5,635 full time employees.

WMS's P/E Ratio Is Comparable to its Sector Average

Compared to the Industrials sector's average of 21.46, Advanced Drainage Systems has a trailing twelve month price to earnings (P/E) ratio of 18.6 and an expected P/E ratio of 16.9. P/E ratios are calculated by dividing the company's share price by either its trailing 12 month ($5.42) or forward earnings per share ($5.97).

Earnings is another term for the net profits left over after subtracting cost of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since Advanced Drainage Systems's P/E ratio is near its sector average of 21.46, we can deduce that the market is fairly valuing the company's earnings.

Advanced Drainage Systems Is Fairly Valued in Terms of Expected Growth

Another factor pointing to Advanced Drainage Systems's value is its PEG ratio of 0.84. This is the stock's price to earnings ratio divided by its estimated earnings growth rate. If the resulting ratio is near or lower than 1 -- but higher than 0 -- its indicates that the company is faitly valued in terms of expected growth.

WMS Has an Alarming P/B Ratio

The price to book (P/B) ratio of a company is a comparison of the company's market capitalization versus its net asset, or book value. A ratio lower than 1 tells you that the equity market is undervaluing the book value of the company's assets, and ratios higher than 1 tell you that the equity markets are overvaluing the company in terms of its assets.

Of course, a company is worth much more than its assets alone, so the focus on P/B ratio is mainly to enable investors to single out undervalued securities that offer a margin of safety. Since Advanced Drainage Systems's P/B ratio of 7.1 is higher than its sector average of 3.7, such a margin of safety does not exist for the stock.

WMS Is Generating Cash

Advanced Drainage Systems has decent free cash flows. This represents the actual cash that the company is generating from its sales revenues, minus its re-investments in the business (capital expenditures). The company's operating cash flows have an average growth rate of 36.8%, compared to 53.8% for capital expenditures. From the table below we can also see that the free cash flows has an average growth rate of 36.9% and a coefficient of variability of 57.9%:

Date Reported Cash Flow from Operations ($ MM) Capital expenditures ($ MM) Free Cash Flow ($ MM) YoY Growth (%)
2022-03-31 275 -149 126 -66.31
2021-03-31 452 -79 373 56.58
2020-03-31 306 -68 239 120.3
2019-03-31 152 -43 108 n/a

Advanced Drainage Systems's Is a Profitable Business

If you are looking to make WMS a long term investment, it's essential that you understand the viability of its business through a study of its margins. Gross margins tell you how much the company makes in profit when only the costs directly related to producing the goods or delivering the service are taken into account. Operating margins, on the other hand, factor in overhead costs so they tell you how effectively Advanced Drainage Systems is run.

Advanced Drainage Systems's Gross Margins

Date Reported Revenue ($ MM) Cost of Revenue ($ MM) Gross Margins (%) YoY Growth (%)
2022-03-31 2,769 1,969 28.9 -16.95
2021-03-31 1,983 1,293 34.8 84.03
2020-03-31 1,674 1,357 18.91 -19.91
2019-03-31 1,385 1,058 23.61 n/a

Advanced Drainage Systems's Operating Margins

Date Reported Total Revenue ($ MM) Operating Expenses ($ MM) Operating Margins (%) YoY Growth (%)
2022-03-31 2,769 385 15 -14.72
2021-03-31 1,983 341 17.59 426.95
2020-03-31 1,674 406 -5.38 -155.98
2019-03-31 1,385 194 9.61 n/a

Advanced Drainage Systems's cost of revenue is growing at a rate of 25.3% in contrast to 35.5% for operating expenses. Sales revenues, on the other hand, have experienced a 26.3% growth rate. As a result, the average gross margins growth is 15.7 and the average operating margins growth rate is 85.4, with coefficients of variability of 25.8% and 111.6% respectively.

Advanced Drainage Systems Benefits From Positive Market Signals

The market sentiment regarding Advanced Drainage Systems is overwhelmingly positive. The stock has an average rating of buy and target prices ranging from $140 to $94. WMS is trading -16.96% away from its target price of $121.17. 5.2% of the company's shares are tied to short positions, and 87.4% of the shares are held by institutional investors.

Holder Shares Date Reported Percentage Value
Vanguard Group, Inc. (The) 6,387,305 2022-09-29 8% $642,690,646
Blackrock Inc. 3,344,498 2022-09-29 4% $336,523,397
Canada Pension Plan Investment Board 3,189,240 2022-09-29 4% $320,901,337
Impax Asset Management Group Plc 2,501,837 2022-09-29 3% $251,734,845
Capital International Investors 2,457,212 2022-09-29 3% $247,244,678
Artisan Partners Limited Partnership 2,274,372 2022-09-29 3% $228,847,316
Invesco Ltd. 1,855,604 2022-09-29 2% $186,710,879
Berkshire Partners LLC 1,826,684 2022-09-29 2% $183,800,949
Boston Partners 1,760,001 2022-09-29 2% $177,091,305
Stockbridge Partners LLC 1,467,649 2022-09-29 2% $147,674,846
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.