Advanced Drainage has had an impressive run over the past six months as its shares have beaten the S&P 500 by 13.4%. The stock now trades at $142.55, marking a 38.2% gain. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy Advanced Drainage, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Advanced Drainage Not Exciting?
We’re glad investors have benefited from the price increase, but we're swiping left on Advanced Drainage for now. Here are three reasons there are better opportunities than WMS and a stock we'd rather own.
1. Revenue Growth Flatlining
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 performance shows its demand has slowed significantly as its revenue was flat over the last two years. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Advanced Drainage’s revenue to rise by 1.9%. While this projection implies its newer products and services will catalyze better top-line performance, it is still below average for the sector.
3. EPS Took a Dip Over the Last Two Years
While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.
Sadly for Advanced Drainage, its EPS declined by 1.9% annually over the last two years. We tend to steer our readers away from companies with falling revenue and EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, Advanced Drainage’s low margin of safety could leave its stock price susceptible to large downswings.
Final Judgment
Advanced Drainage isn’t a terrible business, but it doesn’t pass our bar. With its shares topping the market in recent months, the stock trades at 24.5× forward P/E (or $142.55 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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