Advanced Drainage Systems, a leading manufacturer of stormwater and onsite wastewater solutions, has garnered attention following its recent engagement with Impactive Capital, an activist hedge fund known for its focus on environmental, social, and governance (ESG) principles. As of October 21, Impactive Capital disclosed its position in the company, where it holds a 2.14% stake.
Advanced Drainage Systems, alongside its subsidiary Infiltrator Water Technologies, provides vital products for stormwater management and wastewater treatment. The firm operates through various segments, including its Pipe segment, which manufactures thermoplastic corrugated pipes, its Infiltrator segment for plastic leachfield chambers and septic systems, and an Allied Products segment offering complementary products. This diversified structure allows the company to cater to a broad range of markets, including residential, commercial, and agricultural sectors.
Despite its prominent market position—commanding 75% to 95% market share across its business segments and reaching a stock market value of approximately $11.98 billion—Advanced Drainage Systems has faced challenges in recent years. Not only has the company shown a robust compound annual growth rate of 28% in earnings per share since its IPO, but it has also seen its share price performance lag behind the Russell 2000 index over the past one to three years, attributed to investor concerns about cyclical construction spending and potential impacts on profit margins.
Impactive Capital, founded in 2018, emphasizes positive systemic changes to build sustainable businesses while generating long-term returns for shareholders. The hedge fund believes that fears surrounding Advanced Drainage Systems’ exposure to construction market volatility are overstated. The company’s revenue has remained resilient, driven by industry shifts favoring plastic pipes over traditional materials like concrete and steel, as well as successful acquisitions aimed at enhancing its presence in the residential repair and remodeling markets.
Furthermore, the significant increase in extreme weather events necessitates improved stormwater infrastructure, presenting additional opportunities for the company. Advanced Drainage Systems has also been proactive about mitigating potential margin compression. It has diversified its offerings toward higher-margin segments and utilizes a unique strategy of alternating between recycled and virgin resin based on oil prices to maintain profitability.
Impactive’s research suggests that Advanced Drainage Systems is poised for a resurgence in earnings growth, predicting mid-teens growth in earnings per share and strong total return potential. The firm anticipates a three-year total return of 69% and an internal rate of return of 19%, with an optimistic scenario projecting even higher outcomes.
As these developments unfold, stakeholders will be keen to see how the engagement with Impactive Capital influences strategic decisions and operational execution at Advanced Drainage Systems, a company that stands at the forefront of evolving infrastructure needs while navigating market pressures.
