Impactive Capital sees a structural shift creating upside for this wastewater company
Company: Advanced Drainage Systems (WMS)
Business: Advanced Drainage Systems is a manufacturer of rainwater and on-site wastewater solutions. The company and its subsidiary, Infiltrator Water Technologies, provide stormwater drainage and on-site wastewater products used in a wide variety of markets and applications, including commercial, residential, infrastructure and agriculture, while providing customer service. The pipe division manufactures and markets thermoplastic corrugated pipe in the United States. The percolator segment is a provider of plastic leach field chambers and systems, septic tanks and accessories for use primarily in residential applications. Its International segment manufactures and markets products in territories outside the United States, with a strategy focused on markets served through its owned facilities in Canada and through joint ventures in Mexico and South America. The Allied Products segment produces a range of products that are complementary to tubular products.
Stock Market Value: : $11.98 billion ($144.10 per share)
Activist: Influencer Capital
Ownership: 2.14%
Average Cost: no
Activist Comment: 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, starting with a $250 million investment from CalSTRS and now owning 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 to increase returns, particularly from a social and environmental perspective. Impactive focuses on positive systemic change to help build more competitive, sustainable businesses over the long term. Impactive will use the traditional operational, financial and strategic tools that activists use, but will also implement ESG changes they believe are important to the business and increase the company’s profitability and shareholder value. Influencer searches look for high-quality businesses that are often complex and mispriced, have a high minimum maturity over a holding period of three to five years, or can commit to a low 20% IRR and actively engage with management to create multiple ways to win.
what’s going on
On October 21, Impactive said they were engaged in Advanced Drainage Systems.
behind the scenes
Advanced Drainage Systems is the market share leader in plastic stormwater and on-site septic wastewater management solutions. The company is a pioneer in the development and production of plastic drainage products using primarily high-density polyethylene (HDPE) and polypropylene. Recycled materials accounted for 46% of WMS’s purchased inputs in fiscal 2025, making it one of the largest recycling companies in North America. The company has three main business segments: (i) Pipe – storm and drainage pipe, 56% of FY25 revenue; (ii) Allied Products – complementary products to pipe offerings such as storm chambers, structures and fittings, 26%; and (iii) Filter – chambers, tanks and advanced wastewater treatment solutions, 18%. The company has a $15 billion addressable market across its three segments and is a clear industry leader with 75% to 95% market share across its segments.
An extremely high-quality and well-managed company, there is much to like about WMS, which has a long track record of combining growth and sustained tailwinds. As a result, WMS has an impressive track record of growing its earnings per share by almost 10x since its initial public offering, and has a compound annual growth rate per share of 28% with a return on invested capital consistently above 20%. Management is also highly focused on shareholder value and is a large allocator of capital, increasing dividends and initiating buybacks in most years when it does not see a compelling M&A opportunity.
Despite this, the company’s stock price performance has been weak in the last 1 and 3 years. Russell 2000and its shares have been re-rated to a P/E multiple of the low-to-mid 20s. There are two reasons for this: Investors’ fears about the cyclicality of construction spending and margin compression. But Impactive Capital believes both concerns appear exaggerated or misplaced, and that management has built this business to protect its top line from market cyclicality and make margin expansion structural rather than cyclical.
As for the cyclicality of construction spending, construction spending has fallen by 3% year to date as higher interest rates and affordability concerns dampened residential and non-residential construction spending, making it the worst year for construction in the last two decades outside of the global financial crisis. However, the company’s revenue is not decreasing and is not expected to decrease due to various reasons.
First, plastic pipes are stealing market share from concrete and steel. Plastic, which made up only 20% of the market in 2010, now exceeds 40% because it is 20% cheaper than its alternatives and offers superior performance.
Second, with the acquisition of Infiltrator in 2019 and the upcoming acquisition of National Diversified Sales, WMS has increased its presence in the residential repair and remodeling end market, adding flexibility to its revenue streams. This should also make WMS a natural beneficiary of the turnaround in existing home sales, which are currently at a 15-year low.
Third, billion-dollar storm events have increased fivefold since the 1980s, requiring greater investments in resilience and more complex stormwater infrastructure. The company also has a wide moat thanks to high brand loyalty from contractors, vertical integration and excellent distribution network.
As for margin concerns, there are fears that weakness in construction will lead to margin compression. But this is another thing that management has taken many steps and many initiatives to avoid. Over the past six years, the company has been diversifying its business into higher margin Allied Product and Infiltrator offerings; Operating margins for both were set in the mid-50s, whereas pipe’s share was around 30%.
Additionally, one of the largest input costs is oil and resin, and WMS has a unique way to reduce these costs. The company switches between recycled and virgin resins depending on the price of oil. So, when oil is up, they use recycled resin, and when oil is down, they switch to virgin resin and get better margins. WMS is the only one of its competitors that can do this at scale. Moreover, when construction is poor, oil and resin prices tend to fall. So losses on the top line could be offset by 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% year-to-date, resin prices are down 15% to 20%). As a result, pipe and Allied Products’ adjusted EBITDA margins have increased by about 8 percentage points since 2020, but some fear this will eventually normalize.
But Impactive believes this shift is structural, not cyclical, and that WMS can not only avoid margin compression but also see gross margin increase by 100 basis points over the next 12-24 months; something that is not taken into account in forward-looking consensus forecasts.
As a result of these factors combined, Impressive models show that WMS will return to mid-teens EPS growth, predicting three-year total returns and IRR of 69% and 19%, respectively, and an upside scenario of 146% and 34%, respectively.
Ken Squire is the founder and president of 13D Monitor, a corporate research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, an investment fund that invests in a portfolio of activist investments.
