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

Corporate Profile: Advanced Drainage Systems (WMS)

Core Business and Market Position

Advanced Drainage Systems (WMS), with a market value of $11.98 billion, is a leading manufacturer of stormwater and onsite wastewater solutions. The company operates through several key segments:

• Pipe: Manufacturing and marketing of thermoplastic corrugated pipe.
• Infiltrator: Provision of plastic leachfield chambers, systems, and septic tanks for residential applications.
• International: Manufacturing and marketing of products outside the United States, primarily in Canada, Mexico, and South America.
• Allied Products: Manufacturing of products complementary to its primary pipe offerings.

WMS holds a dominant market share, ranging from 75% to 95% across its business segments, within a total addressable market of $15 billion. The company is a pioneer in the use of high-density polyethylene (HDPE) and polypropylene in its drainage products.

Contribution to Sustainable Development Goals (SDGs)

The operations of Advanced Drainage Systems are intrinsically linked to several United Nations Sustainable Development Goals (SDGs).

1. SDG 6: Clean Water and Sanitation: WMS directly contributes to this goal by providing essential infrastructure for stormwater management and wastewater treatment, which are critical for maintaining water quality and sanitation systems.
2. SDG 12: Responsible Consumption and Production: The company is a key proponent of the circular economy. In fiscal year 2025, recycled materials constituted 46% of its purchased inputs, making WMS one of the largest recyclers in North America. This practice reduces waste and decreases reliance on virgin materials.
3. SDG 9: Industry, Innovation, and Infrastructure & SDG 11: Sustainable Cities and Communities: WMS develops and manufactures innovative products that form the basis of resilient infrastructure. Its solutions are vital for sustainable urban development, helping communities manage water resources effectively and mitigate risks such as flooding.
4. SDG 13: Climate Action: As the frequency of major storm events increases due to climate change, the company’s stormwater infrastructure products are essential for climate adaptation and building community resilience.

Activist Engagement: Impactive Capital

Investor Profile and ESG Mandate

Impactive Capital, an activist hedge fund with approximately $3 billion in assets, has acquired a 2.14% ownership stake in WMS. Founded in 2018, the firm is an active Environmental, Social, and Governance (ESG) investor. Impactive Capital’s strategy involves utilizing traditional financial and strategic tools alongside ESG-focused initiatives to enhance corporate profitability, drive long-term shareholder value, and promote positive systemic change.

Investment Thesis and SDG Alignment

Impactive Capital’s investment is predicated on the belief that market concerns regarding WMS are misplaced. The firm sees WMS’s business model as fundamentally aligned with sustainable development, creating a durable competitive advantage.

• The activist investor views WMS’s leadership in recycling and water management not just as an operational detail but as a core driver of value that aligns with global sustainability trends, particularly SDG 12 (Responsible Consumption and Production) and SDG 6 (Clean Water and Sanitation).
• Impactive Capital believes the company’s role in providing climate-resilient infrastructure, which supports SDG 13 (Climate Action), provides a secular tailwind that insulates it from short-term market cycles.

Analysis of Market Concerns and Rebuttals

Cyclicality and Climate Resilience (SDG 11 & 13)

A primary market concern is WMS’s exposure to the cyclicality of construction spending. However, Impactive Capital identifies several mitigating factors that enhance the company’s resilience:

• Market Share Gains: Plastic pipes continue to displace traditional materials like concrete and steel, having grown from 20% of the market in 2010 to over 40% today due to cost and performance advantages. This ongoing conversion supports revenue even in a down market.
• Diversification: Strategic acquisitions have increased WMS’s exposure to the more stable residential repair and remodel market.
• Climate-Driven Demand: A fivefold increase in billion-dollar storm events since the 1980s necessitates greater investment in complex and resilient stormwater infrastructure. This directly supports SDG 11 (Sustainable Cities and Communities) and SDG 13 (Climate Action) by creating non-cyclical demand for WMS products.

Margin Stability and Circular Economy Practices (SDG 12)

The market has expressed concern that margins, which have expanded significantly since 2020, could compress during a construction downturn. Impactive Capital argues this margin expansion is structural, driven by sustainable practices aligned with SDG 12 (Responsible Consumption and Production).

• Product Mix Shift: The company has strategically diversified toward higher-margin segments like Allied Products and Infiltrator.
• Input Cost Mitigation: WMS possesses a unique capability to switch between recycled and virgin resins based on oil price fluctuations. When oil prices are high, it increases its use of recycled resin, and when oil prices fall, it captures higher margins by using cheaper virgin resin. This circular economy approach provides a structural cost advantage and margin stability.
• Counter-Cyclical Margins: Weakness in construction often correlates with lower oil and resin prices, allowing margin gains on the bottom line to offset potential top-line softness.

Financial Outlook and Projections

Projected Growth and Returns

Impactive Capital believes that current market sentiment does not fully account for the structural strengths and sustainable advantages of WMS’s business model. The firm projects that WMS will return to mid-teens earnings per share (EPS) growth. Based on its analysis, Impactive Capital models the following potential returns over a three-year period:

• Base Case: 69% total return (19% IRR).
• Upside Case: 146% total return (34% IRR).

Analysis of Sustainable Development Goals (SDGs) in the Article

1. Which SDGs are addressed or connected to the issues highlighted in the article?

• SDG 6: Clean Water and Sanitation

  The article focuses on Advanced Drainage Systems (WMS), a company described as a “manufacturer of stormwater and onsite wastewater solutions.” Its products, including “septic tanks and accessories” and “advanced wastewater treatment solutions,” directly contribute to managing water resources and sanitation, which is the core objective of SDG 6.

• SDG 9: Industry, Innovation and Infrastructure

  WMS develops and manufactures essential infrastructure for water management. The article highlights the growing need for “increased investment in resiliency and more complex stormwater infrastructure” to cope with extreme weather. The company’s use of innovative materials like plastic pipes, which are “20% cheaper than alternatives and offering superior performance,” and its vertical integration represent advancements in industrial processes and infrastructure development, aligning with SDG 9.

• SDG 11: Sustainable Cities and Communities

  The company’s products are crucial for building resilient communities. By providing effective “stormwater drainage” solutions, WMS helps mitigate the impact of flooding in residential and commercial areas. This is particularly relevant given the article’s statement that “billion-dollar storm events have quintupled since the 1980s,” directly connecting the company’s business to making human settlements safer and more sustainable as per SDG 11.

• SDG 12: Responsible Consumption and Production

  This goal is strongly represented by the company’s manufacturing process. The article explicitly states that “Recycled materials made up 46% of WMS’ purchased inputs in fiscal year 2025, making it one of the largest recyclers in North America.” This commitment to using recycled plastics (HDPE and polypropylene) exemplifies the principles of a circular economy and sustainable production patterns central to SDG 12.

• SDG 13: Climate Action

  The article directly links the demand for WMS’s products to the effects of climate change. The mention of a fivefold increase in “billion-dollar storm events” necessitates climate adaptation strategies. The company’s role in providing “resiliency and more complex stormwater infrastructure” is a direct response to strengthening adaptive capacity to climate-related hazards, which is a key component of SDG 13.

2. What specific targets under those SDGs can be identified based on the article’s content?

• SDG 6: Clean Water and Sanitation

  • Target 6.3: By 2030, improve water quality by reducing pollution… and substantially increasing recycling and safe reuse globally. The company’s “onsite wastewater” and “advanced wastewater treatment solutions” contribute to treating wastewater, thereby improving water quality.

• SDG 9: Industry, Innovation and Infrastructure

  • Target 9.1: Develop quality, reliable, sustainable and resilient infrastructure… to support economic development and human well-being. WMS manufactures products for “stormwater drainage” and “storm chambers,” which are critical components of resilient infrastructure designed to withstand severe weather events.
  • Target 9.4: By 2030, upgrade infrastructure and retrofit industries to make them sustainable, with increased resource-use efficiency and greater adoption of clean and environmentally sound technologies. The article notes that plastic pipes are gaining market share from concrete and steel due to superior performance and lower cost, and highlights the company’s extensive use of recycled materials, which reflects a move towards more sustainable industrial processes.

• SDG 11: Sustainable Cities and Communities

  • Target 11.5: By 2030, significantly reduce… direct economic losses… caused by disasters, including water-related disasters. The company’s stormwater management systems are designed to prevent flooding and manage heavy rainfall, directly contributing to reducing economic and property damage from “billion-dollar storm events.”

• SDG 12: Responsible Consumption and Production

  • Target 12.5: By 2030, substantially reduce waste generation through prevention, reduction, recycling and reuse. WMS is described as “one of the largest recyclers in North America,” actively turning plastic waste into new products and thereby contributing significantly to waste reduction through recycling.

• SDG 13: Climate Action

  • Target 13.1: Strengthen resilience and adaptive capacity to climate-related hazards and natural disasters in all countries. The article states that the increase in severe storm events necessitates “increased investment in resiliency and more complex stormwater infrastructure,” which is precisely what WMS provides, thus enhancing adaptive capacity to climate change impacts.

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

• For Target 9.4 and 12.5 (Responsible Consumption and Production)

  • Indicator: Percentage of recycled material used in production.
  • Explanation: The article provides a specific, quantifiable indicator by stating, “Recycled materials made up 46% of WMS’ purchased inputs in fiscal year 2025.” This directly measures the company’s contribution to recycling and sustainable industrial processes.

• For Target 9.4 (Sustainable Industries and Infrastructure)

  • Indicator: Market share of sustainable materials versus traditional alternatives.
  • Explanation: The article implies this indicator by noting the market shift from concrete and steel to plastic pipes: “Only about 20% of the market in 2010, plastic now exceeds 40%.” This trend can be used to measure the adoption of more resource-efficient materials in infrastructure.

• For Target 13.1 and 11.5 (Climate Action and Sustainable Cities)

  • Indicator: Investment in and deployment of climate-resilient infrastructure.
  • Explanation: The article implies this indicator by linking the quintupling of “billion-dollar storm events” to the need for “increased investment in resiliency and more complex stormwater infrastructure.” Growth in the company’s revenue and sales in this segment would serve as a proxy for progress in building adaptive capacity.

SDGs, Targets, and Indicators Analysis

Source: cnbc.com