Impactive Capital sees a structural shift creating upside for this wastewater company

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 outdoors 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 spread 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 lively 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 appears to be like for prime quality companies which are often complicated and mispriced, the place they’ll underwrite a minimal of a excessive teenagers or low 20% inner fee of return over a three- to five-year holding interval, and have lively 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 remedy 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 a protracted historical past of compounding development and secular tailwinds. Because of this, WMS has a formidable monitor report, having grown earnings per share nearly 10x since its preliminary public providing, and has a 28% EPS compound annual development fee with returns on invested capital persistently 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 worth 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 rationale for that is twofold: investor fears concerning the cyclicality of building spending and margin compression. Nevertheless, Impactive Capital believes that each considerations seem 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 building spending, building spending is down 3% 12 months thus far as greater rates of interest and affordability considerations have dampened residential and non-residential building spending, setting this as much as be the worst 12 months for building previously twenty years except for 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% resulting from 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 rework end-market, including resiliency to its income streams. This also needs to make WMS a pure beneficiary of the reversion in present residence 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 point in building will result in margin compression. Nevertheless, that is one thing else that administration has taken a whole lot 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 among its largest enter prices are oil and resin, and WMS has a novel strategy 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 among 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 will 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%). Because of this, pipe and Allied Merchandise adjusted EBITDA margins have expanded by about 8 proportion factors since 2020, however some concern that this can ultimately normalize.

Nevertheless, Impactive believes that this shift is structural, not cyclical and WMS won’t solely keep away from margin compression however might see gross margin broaden by 100 bps over the following 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 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.