Firm: Superior Drainage Programs (WMS)
Enterprise: Superior Drainage Programs 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 phase manufactures and markets thermoplastic corrugated pipe all through the US. Its infiltrator phase is a supplier of plastic leachfield chambers and programs, septic tanks and equipment, primarily to be used in residential purposes. Its worldwide phase manufactures and markets merchandise in areas exterior the US, with a technique targeted on its owned services in Canada and people markets serviced via its joint ventures in Mexico and South America. Its Allied Merchandise phase 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 Value: 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 buyers. Wolfe and Asmar realized that there was a possibility to make use of instruments, notably on the social and environmental facet, to drive returns. Impactive focuses on optimistic 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 can even implement ESG change that they imagine is materials to the enterprise and drives profitability of the corporate and shareholder worth. Impactive appears for prime quality companies which are often complicated and mispriced, the place they’ll underwrite a minimal of a excessive teenagers or low 20% inside charge 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 Programs.
Behind the scenes
Superior Drainage Programs 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 traces: (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 business chief with 75% to 95% market share throughout its segments.
There’s a lot to love about WMS, as it’s a particularly high-quality and well-run firm with a protracted historical past of compounding progress and secular tailwinds. In consequence, WMS has a formidable monitor report, having grown earnings per share virtually 10x since its preliminary public providing, and has a 28% EPS compound annual progress charge with returns on invested capital persistently above 20%. Administration can also be very targeted on shareholder worth and are nice capital allocators, growing 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 intervals, underperforming the Russell 2000, and its inventory has re-rated right down to a P/E a number of within the low-to-mid 20s. The explanation for that is twofold: investor fears relating to the cyclicality of building spending and margin compression. Nevertheless, Impactive Capital believes that each issues look like overblown or misplaced and that administration has constructed this enterprise to guard its high line from market cyclicality and make margin enlargement structural, not cyclical.
As to the cyclicality of building spending, building spending is down 3% 12 months to this point as greater rates of interest and affordability issues have dampened residential and non-residential building spending, setting this as much as be the worst 12 months for building prior to now twenty years other than 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 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 residence gross sales, that are at present at a 15-year low.
Third, billion-dollar storm occasions have quintupled for the reason that 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 glorious distribution community.
As for margin issues, there are fears that weak point in building will result in margin compression. Nevertheless, that is one thing else that administration has taken loads 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, considered one of its largest enter prices are oil and resin, and WMS has a novel technique 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 considered one of its opponents who can do that at scale. Furthermore, when building is weak, oil and resin costs have a tendency to say no. So, loss to the highest line could be made up on the underside line because the decline in resin costs is greater than sufficient to offset end-market weaknesses (i.e., building spending is down about 3% YTD, resin costs are down 15% to twenty%). In consequence, pipe and Allied Merchandise adjusted EBITDA margins have expanded by about 8 share factors since 2020, however some worry that this can finally normalize.
Nevertheless, Impactive believes that this shift is structural, not cyclical and WMS is not going to solely keep away from margin compression however might see gross margin develop by 100 bps over the subsequent 12-24 months; one thing that isn’t factored into ahead consensus estimates.
Because of this confluence of things, Impactive fashions that WMS will return to mid-teens EPS progress 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.
