Advanced Drainage has been treading water for the past six months, recording a small loss of 1.4% while holding steady at $147.12. The stock also fell short of the S&P 500’s 9% gain during that period.
Is now the time to buy Advanced Drainage, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Advanced Drainage Not Exciting?
We’re cautious about Advanced Drainage. Here are three reasons we avoid WMS, plus one stock we’d rather own.
1. Lackluster Revenue Growth
Long-term growth is the most important, but within industrials, a stretched historical view may miss new industry trends or demand cycles. Advanced Drainage’s recent performance shows its demand has slowed as its annualized revenue growth of 3% over the last two years was below its five-year trend. We’re wary when companies in the sector see decelerations in revenue growth, as it could signal changing consumer tastes aided by low switching costs. 
2. EPS Took a Dip Over the Last Two Years
Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.
Sadly for Advanced Drainage, its EPS declined by 1.8% annually over the last two years while its revenue grew by 3%. This tells us the company became less profitable on a per-share basis as it expanded.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
Unfortunately, Advanced Drainage’s ROIC averaged 2.9 percentage point decreases each year over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Advanced Drainage isn’t a terrible business, but it isn’t one of our picks. With its shares lagging the market recently, the stock trades at 23.5× forward P/E (or $147.12 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We’re pretty confident there are more exciting stocks to buy at the moment. Let us point you toward our favorite semiconductor picks and shovels play.
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