Firm: Superior Drainage Methods (WMS)
Enterprise: Superior Drainage Methods is a producer of stormwater and onsite wastewater options. The corporate and its subsidiary, Infiltrator Water Applied sciences, present stormwater drainage and onsite wastewater merchandise utilized in all kinds of markets and purposes, together with industrial, residential, infrastructure and agriculture, whereas delivering customer support. Its pipe section manufactures and markets thermoplastic corrugated pipe all through the US. Its infiltrator section is a supplier of plastic leachfield chambers and methods, septic tanks and equipment, primarily to be used in residential purposes. Its worldwide section manufactures and markets merchandise in areas exterior the US, with a technique centered on its owned services in Canada and people markets serviced by way of its joint ventures in Mexico and South America. Its Allied Merchandise section manufactures a variety of merchandise that are complementary to their pipe merchandise.
Inventory Market Worth: : $11.98 billion ($144.10 per share)
Activist: Impactive Capital
Possession: 2.14%
Common Price: n/a
Activist Commentary: Impactive Capital is an activist hedge fund based in 2018 by Lauren Taylor Wolfe and Christian Alejandro Asmar. Impactive Capital is an energetic ESG investor that launched with a $250 million funding from CalSTRS and now has roughly $3 billion. In simply seven years, they’ve made fairly a reputation for themselves as AESG traders. Wolfe and Asmar realized that there was a possibility to make use of instruments, notably on the social and environmental aspect, to drive returns. Impactive focuses on constructive systemic change to assist construct extra aggressive, sustainable companies for the long term. Impactive will use conventional operational, monetary and strategic instruments that activists use, however may also implement ESG change that they consider is materials to the enterprise and drives profitability of the corporate and shareholder worth. Impactive seems for prime quality companies which might be often complicated and mispriced, the place they’ll underwrite a minimal of a excessive teenagers or low 20% inside price of return over a three- to five-year holding interval, and have energetic engagement with administration to arrange a number of methods to win.
What’s occurring
On Oct. 21, Impactive stated they’d taken a place in Superior Drainage Methods.
Behind the scenes
Superior Drainage Methods is the market share chief in plastic stormwater and onsite septic wastewater administration options. The corporate is a pioneer within the improvement and manufacturing of plastic drainage merchandise, primarily using high-density polyethylene (HDPE) and polypropylene. Recycled supplies made up 46% of WMS’ bought inputs in fiscal 12 months 2025, making it one of many largest recyclers in North America. The corporate has three major enterprise strains: (i) Pipe – storm and drainage pipe, 56% of FY25 income; (ii) Allied Merchandise – complementary merchandise to its pipe choices like storm chambers, buildings and fittings, 26%; and (iii) Infiltrator – chambers, tanks and superior wastewater therapy options, 18%. Between its three segments, the corporate has a $15 billion addressable market and is the clear trade chief with 75% to 95% market share throughout its segments.
There’s a lot to love about WMS, as it’s an especially high-quality and well-run firm with an extended historical past of compounding development and secular tailwinds. Consequently, WMS has a powerful monitor file, having grown earnings per share virtually 10x since its preliminary public providing, and has a 28% EPS compound annual development price with returns on invested capital constantly above 20%. Administration can also be very centered on shareholder worth and are nice capital allocators, rising dividends and launching buybacks in most years the place it doesn’t see a compelling M&A chance.
Regardless of this, the corporate’s share value efficiency has been lackluster over the previous 1- and 3-year durations, underperforming the Russell 2000, and its inventory has re-rated all the way down to a P/E a number of within the low-to-mid 20s. The rationale for that is twofold: investor fears relating to the cyclicality of development spending and margin compression. Nevertheless, Impactive Capital believes that each considerations look like overblown or misplaced and that administration has constructed this enterprise to guard its prime line from market cyclicality and make margin enlargement structural, not cyclical.
As to the cyclicality of development spending, development spending is down 3% 12 months to this point as larger rates of interest and affordability considerations have dampened residential and non-residential development spending, setting this as much as be the worst 12 months for development up to now twenty years apart from the worldwide monetary disaster. However firm income has not been declining and isn’t anticipated to say no for a number of causes.
First, plastic pipes have been stealing market share from concrete and metal. Solely about 20% of the market in 2010, plastic now exceeds 40% because of it being 20% cheaper than alternate options and providing superior efficiency.
Second, with the 2019 acquisition of Infiltrator and the upcoming acquisition of Nationwide Diversified Gross sales, WMS has elevated its publicity to the residential restore and transform end-market, including resiliency to its income streams. This also needs to make WMS a pure beneficiary of the reversion in current dwelling gross sales, that are presently at a 15-year low.
Third, billion-dollar storm occasions have quintupled because the Nineteen Eighties, necessitating elevated funding in resiliency and extra complicated stormwater infrastructure. The corporate additionally has a large moat, enabled by its excessive model loyalty from contractors, its vertical integration and wonderful distribution community.
As for margin considerations, there are fears that weak spot in development will result in margin compression. Nevertheless, that is one thing else that administration has taken plenty of steps and adopted many initiatives to keep away from. Over the previous six years, the corporate has been diversifying its enterprise towards its higher-margin Allied Product and Infiltrator choices, each of which have adjusted working margins within the mid-50s, whereas pipe is round 30%.
Moreover, one in every of its largest enter prices are oil and resin, and WMS has a novel solution to mitigate these prices. The corporate toggles between recycled and virgin resins relying on the worth of oil. So, when oil spikes, they use recycled resin, and when it drops, they swap to virgin resin and seize higher margins. WMS is the one one in every of its opponents who can do that at scale. Furthermore, when development is weak, oil and resin costs have a tendency to say no. So, loss to the highest line may be made up on the underside line because the decline in resin costs is greater than sufficient to offset end-market weaknesses (i.e., development spending is down about 3% YTD, resin costs are down 15% to twenty%). Consequently, pipe and Allied Merchandise adjusted EBITDA margins have expanded by about 8 proportion factors since 2020, however some concern that it will ultimately normalize.
Nevertheless, Impactive believes that this shift is structural, not cyclical and WMS won’t solely keep away from margin compression however may see gross margin develop by 100 bps over the subsequent 12-24 months; one thing that’s not factored into ahead consensus estimates.
Because of this confluence of things, Impactive fashions that WMS will return to mid-teens EPS development and initiatives a base case three-year whole return and IRR of 69% and 19%, respectively, and an upside case of 146% and 34%, respectively.
Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist investments.
