Water management company Advanced Drainage Systems (NYSE:WMS) fell short of analysts' expectations in Q2 CY2024, with revenue up 4.8% year on year to $815.3 million. The company's full-year revenue guidance of $2.98 billion at the midpoint also came in 1.1% below analysts' estimates. It made a non-GAAP profit of $2.06 per share, down from its profit of $2.18 per share in the same quarter last year.
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Advanced Drainage (WMS) Q2 CY2024 Highlights:
- Revenue: $815.3 million vs analyst estimates of $831.8 million (2% miss)
- EPS (non-GAAP): $2.06 vs analyst expectations of $2.07 (in line)
- The company reconfirmed its revenue guidance for the full year of $2.98 billion at the midpoint
- EBITDA guidance for the full year is $960 million at the midpoint, below analyst estimates of $969 million
- Gross Margin (GAAP): 40.8%, down from 42.6% in the same quarter last year
- EBITDA Margin: 33.8%, down from 36.2% in the same quarter last year
- Free Cash Flow of $125.7 million is up from -$29.76 million in the previous quarter
- Market Capitalization: $11.55 billion
Scott Barbour, President and Chief Executive Officer of ADS commented, “We are pleased with the fiscal first quarter results, which were right in line with the plan. Revenue growth was led by an 8% increase in Allied product sales and a 6% increase in sales from the Infiltrator business. Revenue in the domestic construction markets increased 6% overall, driven by volume growth in the non-residential, residential and infrastructure end markets at both ADS and Infiltrator. Infrastructure revenue remains a bright spot for the Company as we see the tailwind from the IIJA and ADS’ products gain market share in the segment.”
Originally started as a farm water drainage company, Advanced Drainage Systems (NYSE:WMS) provides clean water management solutions to communities across America.
HVAC and Water Systems
Many HVAC and water systems companies sell essential, non-discretionary infrastructure for buildings. Since the useful lives of these water heaters and vents are fairly standard, these companies have a portion of predictable replacement revenue. In the last decade, trends in energy efficiency and clean water are driving innovation that is leading to incremental demand. On the other hand, new installations for these companies are at the whim of residential and commercial construction volumes, which tend to be cyclical and can be impacted heavily by economic factors such as interest rates.
Sales Growth
Examining a company's long-term performance can provide clues about its business quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Luckily, Advanced Drainage's sales grew at an incredible 15.6% compounded annual growth rate over the last five years. This is a great starting point for our analysis because it shows Advanced Drainage's offerings resonate with customers.
We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Advanced Drainage's recent history marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 1.7% over the last two years.
Advanced Drainage also breaks out the revenue for its most important segment, Pipe. Over the last two years, Advanced Drainage's Pipe revenue (thermoplastic corrugated pipes) averaged 3% year-on-year declines. This segment has lagged the company's overall sales.
This quarter, Advanced Drainage's revenue grew 4.8% year on year to $815.3 million, falling short of Wall Street's estimates. Looking ahead, Wall Street expects sales to grow 5.1% over the next 12 months.
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Operating Margin
Advanced Drainage has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 19.9%. This result isn't too surprising as its gross margin gives it a favorable starting point.
Looking at the trend in its profitability, Advanced Drainage's annual operating margin rose by 12.5 percentage points over the last five years, as its sales growth gave it immense operating leverage.
This quarter, Advanced Drainage generated an operating profit margin of 27.7%, down 3.8 percentage points year on year. Since Advanced Drainage's operating margin decreased more than its gross margin, we can assume the company was recently less efficient because expenses such as sales, marketing, R&D, and administrative overhead increased.
EPS
Analyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions.
Advanced Drainage's full-year EPS flipped from negative to positive over the last five years. This is a good sign and shows it's at an inflection point.
Like with revenue, we also analyze EPS over a shorter period to see if we are missing a change in the business. Advanced Drainage's EPS grew at a spectacular 16% compounded annual growth rate over the last two years, higher than its 1.7% annualized revenue declines. However, this alone doesn't tell us much about its day-to-day operations because its operating margin didn't expand during this timeframe.
We can take a deeper look into Advanced Drainage's earnings to better understand the drivers of its performance. A two-year view shows that Advanced Drainage has repurchased its stock, shrinking its share count by 7.2%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings. 
In Q2, Advanced Drainage reported EPS at $2.06, down from $2.18 in the same quarter last year. This print was close to analysts' estimates. Over the next 12 months, Wall Street expects Advanced Drainage to grow its earnings. Analysts are projecting its EPS of $6.32 in the last year to climb by 10.9% to $7.02.
Key Takeaways from Advanced Drainage's Q2 Results
We struggled to find many strong positives in these results. Its revenue fell short of Wall Street's estimates as its Pipe segment underperformed. Its full-year EBITDA guidance also missed analysts' estimates. Overall, this was a slower quarter for Advanced Drainage. The stock traded down 4.7% to $142.20 immediately following the results.
Advanced Drainage may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.