Intrinsic value of Advanced Drainage Systems - WMS

Previous Close

$23.15

  Intrinsic Value

$7.58

stock screener

  Rating & Target

str. sell

-67%

Previous close

$23.15

 
Intrinsic value

$7.58

 
Up/down potential

-67%

 
Rating

str. sell

We calculate the intrinsic value of WMS stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2017), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 1.3

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2017(a)
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046
   2047

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -2.63
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  1,257
  1,282
  1,312
  1,345
  1,383
  1,425
  1,471
  1,521
  1,575
  1,634
  1,697
  1,764
  1,835
  1,911
  1,992
  2,078
  2,169
  2,266
  2,368
  2,476
  2,589
  2,709
  2,836
  2,969
  3,110
  3,258
  3,414
  3,578
  3,751
  3,932
  4,123
Variable operating expenses, $m
 
  567
  579
  594
  610
  629
  649
  670
  694
  719
  746
  765
  796
  830
  865
  902
  941
  983
  1,028
  1,074
  1,124
  1,176
  1,231
  1,289
  1,350
  1,414
  1,482
  1,553
  1,628
  1,706
  1,789
Fixed operating expenses, $m
 
  658
  675
  691
  709
  726
  745
  763
  782
  802
  822
  842
  863
  885
  907
  930
  953
  977
  1,001
  1,026
  1,052
  1,078
  1,105
  1,133
  1,161
  1,190
  1,220
  1,250
  1,282
  1,314
  1,347
Total operating expenses, $m
  1,181
  1,225
  1,254
  1,285
  1,319
  1,355
  1,394
  1,433
  1,476
  1,521
  1,568
  1,607
  1,659
  1,715
  1,772
  1,832
  1,894
  1,960
  2,029
  2,100
  2,176
  2,254
  2,336
  2,422
  2,511
  2,604
  2,702
  2,803
  2,910
  3,020
  3,136
Operating income, $m
  76
  58
  58
  60
  64
  70
  78
  88
  99
  113
  128
  156
  175
  197
  221
  247
  275
  306
  339
  375
  414
  455
  500
  548
  599
  654
  712
  775
  841
  912
  987
EBITDA, $m
  148
  128
  130
  134
  140
  148
  158
  170
  184
  200
  219
  239
  262
  287
  315
  345
  377
  413
  451
  492
  536
  583
  634
  688
  746
  808
  873
  944
  1,018
  1,098
  1,182
Interest expense (income), $m
  17
  17
  18
  18
  19
  20
  21
  22
  23
  24
  25
  27
  28
  30
  32
  34
  36
  38
  40
  42
  45
  47
  50
  53
  56
  59
  62
  66
  70
  74
  78
Earnings before tax, $m
  65
  41
  40
  42
  45
  50
  57
  66
  77
  89
  103
  129
  147
  167
  189
  213
  239
  268
  299
  333
  369
  408
  450
  495
  543
  595
  650
  709
  772
  838
  910
Tax expense, $m
  25
  11
  11
  11
  12
  14
  15
  18
  21
  24
  28
  35
  40
  45
  51
  58
  65
  72
  81
  90
  100
  110
  122
  134
  147
  161
  176
  191
  208
  226
  246
Net income, $m
  33
  30
  29
  31
  33
  37
  42
  48
  56
  65
  75
  94
  107
  122
  138
  156
  175
  196
  218
  243
  269
  298
  329
  361
  397
  434
  475
  517
  563
  612
  664

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  6
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  1,046
  1,060
  1,085
  1,113
  1,144
  1,179
  1,217
  1,258
  1,303
  1,351
  1,403
  1,459
  1,518
  1,581
  1,648
  1,719
  1,794
  1,874
  1,959
  2,048
  2,142
  2,241
  2,346
  2,456
  2,572
  2,695
  2,824
  2,959
  3,102
  3,252
  3,411
Adjusted assets (=assets-cash), $m
  1,040
  1,060
  1,085
  1,113
  1,144
  1,179
  1,217
  1,258
  1,303
  1,351
  1,403
  1,459
  1,518
  1,581
  1,648
  1,719
  1,794
  1,874
  1,959
  2,048
  2,142
  2,241
  2,346
  2,456
  2,572
  2,695
  2,824
  2,959
  3,102
  3,252
  3,411
Revenue / Adjusted assets
  1.209
  1.209
  1.209
  1.208
  1.209
  1.209
  1.209
  1.209
  1.209
  1.209
  1.210
  1.209
  1.209
  1.209
  1.209
  1.209
  1.209
  1.209
  1.209
  1.209
  1.209
  1.209
  1.209
  1.209
  1.209
  1.209
  1.209
  1.209
  1.209
  1.209
  1.209
Average production assets, $m
  463
  472
  483
  495
  509
  524
  541
  560
  580
  601
  624
  649
  675
  703
  733
  765
  798
  834
  871
  911
  953
  997
  1,044
  1,093
  1,144
  1,199
  1,256
  1,317
  1,380
  1,447
  1,517
Working capital, $m
  185
  242
  248
  254
  261
  269
  278
  288
  298
  309
  321
  333
  347
  361
  377
  393
  410
  428
  448
  468
  489
  512
  536
  561
  588
  616
  645
  676
  709
  743
  779
Total debt, $m
  429
  438
  454
  473
  495
  519
  545
  573
  604
  637
  673
  711
  751
  795
  841
  889
  941
  996
  1,054
  1,115
  1,179
  1,247
  1,319
  1,395
  1,475
  1,559
  1,647
  1,740
  1,838
  1,941
  2,050
Total liabilities, $m
  719
  728
  744
  763
  785
  809
  835
  863
  894
  927
  963
  1,001
  1,041
  1,085
  1,131
  1,179
  1,231
  1,286
  1,344
  1,405
  1,469
  1,537
  1,609
  1,685
  1,765
  1,849
  1,937
  2,030
  2,128
  2,231
  2,340
Total equity, $m
  327
  333
  341
  349
  359
  370
  382
  395
  409
  424
  441
  458
  477
  496
  517
  540
  563
  589
  615
  643
  673
  704
  737
  771
  808
  846
  887
  929
  974
  1,021
  1,071
Total liabilities and equity, $m
  1,046
  1,061
  1,085
  1,112
  1,144
  1,179
  1,217
  1,258
  1,303
  1,351
  1,404
  1,459
  1,518
  1,581
  1,648
  1,719
  1,794
  1,875
  1,959
  2,048
  2,142
  2,241
  2,346
  2,456
  2,573
  2,695
  2,824
  2,959
  3,102
  3,252
  3,411
Debt-to-equity ratio
  1.312
  1.310
  1.330
  1.350
  1.380
  1.400
  1.430
  1.450
  1.480
  1.500
  1.530
  1.550
  1.580
  1.600
  1.620
  1.650
  1.670
  1.690
  1.710
  1.730
  1.750
  1.770
  1.790
  1.810
  1.830
  1.840
  1.860
  1.870
  1.890
  1.900
  1.910
Adjusted equity ratio
  0.309
  0.314
  0.314
  0.314
  0.314
  0.314
  0.314
  0.314
  0.314
  0.314
  0.314
  0.314
  0.314
  0.314
  0.314
  0.314
  0.314
  0.314
  0.314
  0.314
  0.314
  0.314
  0.314
  0.314
  0.314
  0.314
  0.314
  0.314
  0.314
  0.314
  0.314

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  33
  30
  29
  31
  33
  37
  42
  48
  56
  65
  75
  94
  107
  122
  138
  156
  175
  196
  218
  243
  269
  298
  329
  361
  397
  434
  475
  517
  563
  612
  664
Depreciation, amort., depletion, $m
  72
  71
  72
  74
  75
  77
  80
  82
  84
  87
  90
  83
  87
  90
  94
  98
  102
  107
  112
  117
  122
  128
  134
  140
  147
  154
  161
  169
  177
  186
  195
Funds from operations, $m
  90
  100
  101
  104
  108
  114
  121
  130
  140
  152
  165
  177
  194
  212
  232
  254
  277
  303
  330
  360
  392
  426
  462
  502
  543
  588
  636
  686
  740
  798
  859
Change in working capital, $m
  -14
  5
  6
  6
  7
  8
  9
  9
  10
  11
  12
  13
  14
  14
  15
  16
  17
  18
  19
  20
  21
  23
  24
  25
  27
  28
  29
  31
  33
  34
  36
Cash from operations, $m
  104
  96
  96
  98
  101
  106
  113
  121
  130
  141
  153
  165
  180
  198
  217
  237
  260
  284
  311
  339
  370
  403
  438
  476
  517
  560
  606
  655
  708
  763
  822
Maintenance CAPEX, $m
  0
  -59
  -60
  -62
  -63
  -65
  -67
  -69
  -72
  -74
  -77
  -80
  -83
  -87
  -90
  -94
  -98
  -102
  -107
  -112
  -117
  -122
  -128
  -134
  -140
  -147
  -154
  -161
  -169
  -177
  -186
New CAPEX, $m
  -51
  -9
  -11
  -12
  -14
  -15
  -17
  -18
  -20
  -22
  -23
  -25
  -26
  -28
  -30
  -32
  -34
  -35
  -38
  -40
  -42
  -44
  -47
  -49
  -52
  -54
  -57
  -60
  -64
  -67
  -70
Cash from investing activities, $m
  -61
  -68
  -71
  -74
  -77
  -80
  -84
  -87
  -92
  -96
  -100
  -105
  -109
  -115
  -120
  -126
  -132
  -137
  -145
  -152
  -159
  -166
  -175
  -183
  -192
  -201
  -211
  -221
  -233
  -244
  -256
Free cash flow, $m
  43
  27
  25
  23
  24
  26
  29
  33
  38
  45
  53
  60
  71
  83
  97
  112
  128
  147
  166
  188
  211
  237
  264
  293
  325
  359
  395
  434
  475
  519
  567
Issuance/(repayment) of debt, $m
  -34
  15
  17
  19
  21
  24
  26
  28
  31
  33
  36
  38
  41
  43
  46
  49
  52
  55
  58
  61
  65
  68
  72
  76
  80
  84
  88
  93
  98
  103
  108
Issuance/(repurchase) of shares, $m
  4
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -26
  15
  17
  19
  21
  24
  26
  28
  31
  33
  36
  38
  41
  43
  46
  49
  52
  55
  58
  61
  65
  68
  72
  76
  80
  84
  88
  93
  98
  103
  108
Total cash flow (excl. dividends), $m
  17
  42
  41
  43
  45
  49
  55
  61
  69
  78
  89
  98
  111
  126
  143
  160
  180
  201
  224
  249
  276
  305
  336
  369
  405
  443
  484
  527
  573
  623
  675
Retained Cash Flow (-), $m
  -35
  -6
  -8
  -9
  -10
  -11
  -12
  -13
  -14
  -15
  -16
  -17
  -19
  -20
  -21
  -22
  -24
  -25
  -26
  -28
  -30
  -31
  -33
  -35
  -37
  -38
  -40
  -43
  -45
  -47
  -50
Prev. year cash balance distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  36
  34
  34
  35
  38
  43
  48
  55
  63
  73
  81
  93
  106
  122
  138
  156
  176
  198
  221
  246
  274
  303
  334
  368
  404
  443
  484
  528
  575
  625
Discount rate, %
 
  7.80
  8.19
  8.60
  9.03
  9.48
  9.95
  10.45
  10.98
  11.52
  12.10
  12.71
  13.34
  14.01
  14.71
  15.44
  16.22
  17.03
  17.88
  18.77
  19.71
  20.70
  21.73
  22.82
  23.96
  25.16
  26.41
  27.73
  29.12
  30.58
  32.11
PV of cash for distribution, $m
 
  33
  29
  26
  25
  24
  24
  24
  24
  24
  23
  22
  21
  19
  18
  16
  14
  12
  10
  8
  7
  5
  4
  3
  2
  1
  1
  1
  0
  0
  0
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Advanced Drainage Systems, Inc. is engaged in designing, manufacturing and marketing of thermoplastic corrugated pipe and related water management products, primarily in North and South America, and Europe. The Company operates through two segments: Domestic and International. The Domestic segment manufactures and markets products throughout the United States. The International segment manufactures and markets products in certain regions outside of the United States, with a focus on its owned facilities in Canada and through its joint ventures with local partners in Mexico, Central America and South America. Its product line includes corrugated high density polyethylene (HDPE) pipe, polypropylene (PP) pipe and related water management products. Its products are used across a range of end markets and applications, including non-residential, residential, agriculture and infrastructure applications.

FINANCIAL RATIOS  of  Advanced Drainage Systems (WMS)

Valuation Ratios
P/E Ratio 38.8
Price to Sales 1
Price to Book 3.9
Price to Tangible Book
Price to Cash Flow 12.3
Price to Free Cash Flow 24.2
Growth Rates
Sales Growth Rate -2.6%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 13.3%
Cap. Spend. - 3 Yr. Gr. Rate 4.5%
Financial Strength
Quick Ratio 0
Current Ratio 0
LT Debt to Equity 113.1%
Total Debt to Equity 131.2%
Interest Coverage 5
Management Effectiveness
Return On Assets 4.2%
Ret/ On Assets - 3 Yr. Avg. 2.2%
Return On Total Capital 4.5%
Ret/ On T. Cap. - 3 Yr. Avg. 2.3%
Return On Equity 10.7%
Return On Equity - 3 Yr. Avg. 5.3%
Asset Turnover 1.2
Profitability Ratios
Gross Margin 23.5%
Gross Margin - 3 Yr. Avg. 21%
EBITDA Margin 12.3%
EBITDA Margin - 3 Yr. Avg. 10.4%
Operating Margin 6%
Oper. Margin - 3 Yr. Avg. 5.6%
Pre-Tax Margin 5.2%
Pre-Tax Margin - 3 Yr. Avg. 3.4%
Net Profit Margin 2.6%
Net Profit Margin - 3 Yr. Avg. 1.3%
Effective Tax Rate 38.5%
Eff/ Tax Rate - 3 Yr. Avg. 65.8%
Payout Ratio 51.5%

WMS stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the WMS stock intrinsic value calculation we used $1257 million for the last fiscal year's total revenue generated by Advanced Drainage Systems. The default revenue input number comes from 2017 income statement of Advanced Drainage Systems. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our WMS stock valuation model: a) initial revenue growth rate of 2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 7.8%, whose default value for WMS is calculated based on our internal credit rating of Advanced Drainage Systems, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Advanced Drainage Systems.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of WMS stock the variable cost ratio is equal to 44.2%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $642 million in the base year in the intrinsic value calculation for WMS stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 4% for Advanced Drainage Systems.

Corporate tax rate of 27% is the nominal tax rate for Advanced Drainage Systems. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the WMS stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for WMS are equal to 36.8%.

Life of production assets of 7.8 years is the average useful life of capital assets used in Advanced Drainage Systems operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for WMS is equal to 18.9%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $327 million for Advanced Drainage Systems - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 55.738 million for Advanced Drainage Systems is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Advanced Drainage Systems at the current share price and the inputted number of shares is $1.3 billion.

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COMPANY NEWS

▶ Advanced Drainage posts 2Q profit   [Nov-02-17 07:03AM  Associated Press]
▶ New Strong Sell Stocks for October 17th   [Oct-17-17 09:53AM  Zacks]
▶ Advanced Drainage Systems Announces Key Management Changes   [Aug-17-17 06:45AM  Business Wire]
▶ Advanced Drainage posts 1Q profit   [07:11AM  Associated Press]
▶ Advanced Drainage reports 4Q loss   [May-25-17 07:32AM  Associated Press]
▶ New Strong Sell Stocks for May 10th   [May-10-17 09:06AM  Zacks]
▶ New Strong Sell Stocks for May 3rd   [May-03-17 09:30AM  Zacks]
▶ Advanced Drainage posts 3Q profit   [06:49AM  Associated Press]
Financial statements of WMS
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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