What a brutal six months it’s been for Advanced Drainage. The stock has dropped 26.7% and now trades at $114.33, rattling many shareholders. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.

Given the weaker price action, is now an opportune time to buy WMS? Find out in our full research report, it’s free.

Why Does Advanced Drainage Spark Debate?

Originally started as a farm water drainage company, Advanced Drainage Systems (NYSE:WMS) provides clean water management solutions to communities across America.

Two Positive Attributes:

1. Operating Margin Reveals a Well-Run Organization

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses–everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Advanced Drainage has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 20.4%. This result isn’t too surprising as its gross margin gives it a favorable starting point.

2. Outstanding Long-Term EPS Growth

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Advanced Drainage’s EPS grew at an astounding 88.4% compounded annual growth rate over the last five years, higher than its 14.2% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

One Reason to be Careful:

Revenue Tumbling Downwards

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 history marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 4.5% over the last two years.

Final Judgment

Advanced Drainage’s merits more than compensate for its flaws. After the recent drawdown, the stock trades at 16.2× forward price-to-earnings (or $114.33 per share). Is now a good time to buy? See for yourself in our full research report, it’s free.

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