Advanced Drainage (WMS)

Water management company Advanced Drainage Systems (NYSE:WMS) beat Wall Street’s revenue expectations in Q3 CY2025, with sales up 8.7% year on year to $850.4 million. The company expects the full year’s revenue to be around $2.95 billion, close to analysts’ estimates. Its non-GAAP profit of $1.97 per share was 19.8% above analysts’ consensus estimates.

Company Overview

Originally started as a farm water drainage company, Advanced Drainage Systems (NYSE:WMS) provides clean water management solutions to communities across America.

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.

Companies offering water waste management solutions include private companies Contech Engineering, Prinsco, and Armtec.

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Thankfully, Advanced Drainage’s 10.4% annualized revenue growth over the last five years was solid. Its growth beat the average industrials company and shows its 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 performance shows its demand has slowed as its annualized revenue growth of 2.7% over the last two years was below its five-year trend.

We can better understand the company’s revenue dynamics by analyzing its most important segments, Pipe and Infiltrators, which are 48.6% and 21.1% of revenue. Over the last two years, Advanced Drainage’s Pipe revenue (thermoplastic corrugated pipes) averaged 3.6% year-on-year declines. On the other hand, its Infiltrators revenue (wastewater treatment systems) averaged 21.8% growth.

This quarter, Advanced Drainage reported year-on-year revenue growth of 8.7%, and its $850.4 million of revenue exceeded Wall Street’s estimates by 6.6%.

Looking ahead, sell-side analysts expect revenue to grow 1.1% over the next 12 months, a slight deceleration versus the last two years. This projection doesn't excite us and implies its products and services will face some demand challenges.

Gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor.

Advanced Drainage’s unit economics are great compared to the broader industrials sector and signal that it enjoys product differentiation through quality or brand. As you can see below, it averaged an excellent 36.2% gross margin over the last five years. Said differently, roughly $36.17 was left to spend on selling, marketing, R&D, and general administrative overhead for every $100 in revenue.

In Q3, Advanced Drainage produced a 40% gross profit margin, marking a 2.4 percentage point increase from 37.6% in the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

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 21.5%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, Advanced Drainage’s operating margin rose by 7.9 percentage points over the last five years, as its sales growth gave it immense operating leverage.

This quarter, Advanced Drainage generated an operating margin profit margin of 26.3%, up 2.3 percentage points year on year. Since its gross margin expanded more than its operating margin, we can infer that leverage on its cost of sales was the primary driver behind the recently higher efficiency.

Revenue trends explain a company’s historical growth, but the long-term change in 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 EPS grew at a spectacular 17.1% compounded annual growth rate over the last five years, higher than its 10.4% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into Advanced Drainage’s earnings quality to better understand the drivers of its performance. As we mentioned earlier, Advanced Drainage’s operating margin expanded by 7.9 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; interest expenses and taxes can also affect EPS but don’t tell us as much about a company’s fundamentals.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For Advanced Drainage, its two-year annual EPS growth of 1.1% was lower than its five-year trend. We hope its growth can accelerate in the future.

In Q3, Advanced Drainage reported adjusted EPS of $1.97, up from $1.70 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Advanced Drainage’s full-year EPS of $6.04 to stay about the same.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Advanced Drainage has shown terrific cash profitability, putting it in an advantageous position to invest in new products, return capital to investors, and consolidate the market during industry downturns. The company’s free cash flow margin was among the best in the industrials sector, averaging 14.6% over the last five years.

Taking a step back, we can see that Advanced Drainage’s margin expanded by 11.3 percentage points during that time. This is encouraging, and we can see it became a less capital-intensive business because its free cash flow profitability rose more than its operating profitability.

Advanced Drainage’s free cash flow clocked in at $176.4 million in Q3, equivalent to a 20.7% margin. This result was good as its margin was 6.4 percentage points higher than in the same quarter last year, building on its favorable historical trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Advanced Drainage hasn’t been the highest-quality company lately, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 22.8%, splendid for an industrials business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Fortunately, Advanced Drainage’s ROIC averaged 3.2 percentage point increases over the last few years. This is a good sign, and if its returns keep rising, there’s a chance it could evolve into an investable business.

Advanced Drainage reported $812.9 million of cash and $1.43 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $933.9 million of EBITDA over the last 12 months, we view Advanced Drainage’s 0.7× net-debt-to-EBITDA ratio as safe. We also see its $38.26 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Advanced Drainage blew past analysts’ EBITDA expectations this quarter. We were also excited its revenue outperformed Wall Street’s estimates by a wide margin. On the other hand, its Pipe revenue missed. Zooming out, we think this quarter featured some important positives. The stock traded up 4.9% to $141.26 immediately after reporting.

Updated: December 4, 2025 at 10:09 PM EST

Before making an investment decision, investors should account for Advanced Drainage’s business fundamentals and valuation in addition to what happened in the latest quarter.

In our opinion, Advanced Drainage is a good company. To kick things off, its revenue growth was solid over the last five years. And while its projected EPS for the next year is lacking, its impressive operating margins show it has a highly efficient business model. On top of that, its rising cash profitability gives it more optionality.

Advanced Drainage’s P/E ratio based on the next 12 months is 24.7x. Looking at the industrials space right now, Advanced Drainage trades at a compelling valuation. If you’re a fan of the business and management team, now is a good time to scoop up some shares.

Wall Street analysts have a consensus one-year price target of $171.10 on the company (compared to the current share price of $150.07), implying they see 14% upside in buying Advanced Drainage in the short term.