We came across a bearish thesis on Advanced Drainage Systems, Inc. (NYSE:WMS) on ValueInvestorsClub by pathbska. In this article, we will summarize the bears’ thesis on WMS. The company’s shares were trading at $125.52 when this thesis was published, vs. the closing price of $108.88 on Mar 14.
An aerial view of an industrial plant manufacturing welded pipes and tubes from stainless steel and galvanized carbon.
WMS designs, manufactures and markets thermoplastic corrugated pipes and related water management products in North America and internationally. 53% of its revenues come from its Pipe business with 16% and 24% of the revenue from the septic tank business (through the acquisition of Infiltrator) and Allied Products, respectively.
WMS had benefitted from the low usage of plastic pipes for applications like stormwater management. A decade ago, plastic pipes accounted for 40% of the market share but the number has increased to 60%. With the Department of Transportation (DOT) of Texas and Florida sanctioning plastic pipes, the market share is expected to be higher. WMS has been dependent on reinforced concrete pipe (RCP) and is looking to venture into the plastic pipe space through its Allied Products segment. However, competition is tough due to the presence of regional players like Lane and Prinsco. Even RCP manufacturers like AmeriTex are entering this segment. With a surge in pipe supply, the 5-10 percentage points higher margin for WMS can no longer be considered sustainable.
WMS has been plagued with issues like late deliveries and slow response times. This has prompted distributors and contractors to seek the services of local players. A higher growth in the Allied Products segment can also cannibalize the revenue from WMS’s pipe segment. In the first half of FY-25, Pipe revenue was up by only 0.6% while Allied Products grew by 5.2%. The inability to maintain a higher growth of its main business can lead to its overall market share.
As far as valuation is concerned, one can expect the gross margin to lower from 43% to 40%, reducing the EPS to $4.8. Historically, the stock has traded at mid-20s P/E multiple, much higher than its current multiple of ~18x. Considering a P/E of 20x, the fair value would be $96, reflecting a 12% downside from its current level.
While we acknowledge the potential of WMS as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than WMS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.
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