New Look for Pipes

06/24/2015 7:00 am EST


Tyler Laundon

Editor, Cabot Small-Cap Confidential

We’re buying a pure play small-cap stock—an industrial company that makes drainage pipe for the construction and agriculture markets—explains Tyler Laundon, editor of Game Changers.

Advanced Drainage Systems (WMS) has been around since the 1960s, but just went public in 2014. The primary use of its drainage pipe is in projects to direct storm surge, rainwater, and sewer drainage.

Now I’m well aware that a pipe manufacturer is the opposite of an exciting investment, but I don’t care.

With population density increasing, weather events becoming more dramatic, and water conservation becoming more and more important, efficient and durable water drainage systems are actually pretty important.

They’re one of those things you don’t think about until the road, or your house, gets washed away (remember hurricane Irene?), a town gets flooded (pick your example), or the local beach is closed due to storm water runoff.

Bottom line, we’ve all experienced some issue—even a flooded basement—with water drainage. Advanced Drainage makes products that are designed to help avoid them.

It specializes in high-performance thermoplastic corrugated pipe and associated fittings, filters, and chambers. More specifically, it makes High Density Polyethylene (HDPE) and Polypropylene (HPPP) pipe.

You’ve likely seen a lot of pre-cast concrete pipe or corrugated metal pipe alongside large construction and infrastructure projects. This is the old way of doing things.

Thermoplastic is the new and improved way. Advanced Drainage’s pipe is typically stronger, more flexible, more durable, quicker to install, and just all-around better than either pre-cast concrete or corrugated metal.

It can also be lighter to transport and less expensive to install. With better joint integrity, the finished product is less susceptible to damage, which is a big deal when burying large water systems under roads, parking lots, and buildings.

Looking forward, it’s reasonable to expect a long-term recovery in residential, commercial and infrastructure spending and construction. This should help Advanced Drainage continue to outgrow the market, as will a long-term shift to thermoplastic pipe from corrugated metal and pre-cast concrete.

Further, Advanced Drainage is mostly a US story at the moment, with 87% of sales derived domestically. But the company operates four plants in Mexico and holds around 30 exclusive territory distribution agreements.

In South America (Brazil, Chile, Argentina, and Colombia) it has four plants and five distribution centers. Canada, in particular, will help in 2015 due to the acquisition of Ideal Pipe, a Canadian thermoplastic pipe manufacturer.

Advanced Drainage doesn’t have a long operating history as a public company. And with its IPO, a special dividend paid and an Employee Stock Ownership Plan, quarterly earnings have been all over the map. I think this will keep the stock out of the limelight for a while longer, but not for too long.

Crunching the numbers, I’m expecting that EPS growth of 73% on the low end and 100% on the high end, which will probably turn some heads by the end of the year. Of course, we’ll already be in the stock so we’ll just be looking straight ahead.

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