Advanced Drainage Systems (NYSE: WMS) beat top- and bottom-line expectations for the quarter, and announced a dividend hike. Investment dollars are flowing into the stock, sending shares of the water management company up 13% as of noon ET Thursday.
A return to growth in the quarter
Advanced Drainage manufactures equipment for stormwater management, septic systems, and other water uses. The company earned $1.37 per share on revenue of $662.4 million in its fiscal third quarter ending Dec. 31, easily surpassing Wall Street's $1.02 per share on revenue of $629 million consensus estimate.
Net sales were up 1.1% for the quarter but down 9.5% through the first nine months of the company's fiscal year, and net income is down slightly so far in fiscal 2024. But in a statement, CEO Scott Barbour said that he was pleased to see a return to year-over-year revenue growth in the most recent quarter, and said the business is performing well in tough conditions.
"Despite ongoing headwinds from higher interest rates, credit tightening, and economic uncertainty, volume increased in the quarter, primarily driven by stronger demand in the infrastructure, residential, and agriculture markets," Barbour said.
Advanced Drainage reported an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin of 30.8% during the most recent quarter, up 490 basis points from the year prior. Margins improved thanks to efficiency gains, as well as from a more lucrative sales mix and the company's efforts to set pricing based on costs.
The company also declared a quarterly dividend of $0.14 per share, an increase of 17% over what was paid in the prior-year quarter.
Is Advanced Drainage a buy following a strong earnings report?
The long-term bull case for a business like this is clear: Water is rapidly becoming one of the planet's most closely watched resources, which should fuel demand for water companies that are making products that help us to better manage that resource. Larger-scale, more frequent water-related climate events should create a need for better stormwater management.
Advanced Drainage today trades at an enterprise value about 13 times EBITDA, which is not unreasonable for a company with the potential to benefit from an area with such massive demand. But with the stock now up 60% in the last 12 months, investors might want to see what becomes of the current headwinds the business has faced instead of jumping in on these highs.
Should you invest $1,000 in Advanced Drainage Systems right now?
Before you buy stock in Advanced Drainage Systems, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Advanced Drainage Systems wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.
*Stock Advisor returns as of February 6, 2024
Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
