Advanced Drainage's Super Ability To Boost Margins: Analyst Highlights How

KeyBanc Capital Markets analyst Jeffrey D. Hammond reiterated an Overweight rating on Advanced Drainage Systems, Inc. WMS, raising the price target to $160 from $150.

Hammond says Advanced Drainage's price/cost should experience sustained tailwinds from relaxing supply chain friction costs (i.e., debottlenecking recycling facilities).

The analyst sees an upside beyond the current guidance range (adj. EBITDA margin of 27.9-29.4%), supported by the continued rise in concrete prices allowing for sustained pricing power paired with falling resin pricing (current weighted virgin resin pricing >-25% below the FY23 average). 

Over the longer term, the analyst sees further margin expansion driven by the ample manufacturing automation opportunities outlined by management.

Despite the company's recent Non-Res'l challenges, the analyst sees WMS's renewed focus on Infrastructure end markets (albeit ~6% of sales) providing some positive support. 

The analyst thinks investors better appreciate the company's LT outgrowth support from the material conversion story and ample runway to further improve margins through organic investments.

The analyst views WMS as a highly attractive pure-play water management business, consistently delivering above-market returns. 

For FY24, the analyst expects the company's revenues to be $2.70 billion, with $815.1 million EBITDA.

Price Action: WMS shares are trading higher by 0.50% to $122.86 on the last check Monday.