Intrinsic value of Advanced Drainage Systems - WMS

Previous Close

$19.50

  Intrinsic Value

$11.38

stock screener

  Rating & Target

sell

-42%

  Value-price divergence*

-46%

Previous close

$19.50

 
Intrinsic value

$11.38

 
Up/down potential

-42%

 
Rating

sell

 
Value-price divergence*

-46%

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

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 2016), $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 1.0

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   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

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  9.41
  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
  1,291
  1,317
  1,347
  1,382
  1,421
  1,464
  1,511
  1,562
  1,618
  1,678
  1,742
  1,811
  1,885
  1,963
  2,046
  2,135
  2,228
  2,327
  2,432
  2,543
  2,659
  2,783
  2,913
  3,050
  3,194
  3,346
  3,506
  3,675
  3,852
  4,039
  4,235
Variable operating expenses, $m
 
  653
  668
  685
  704
  725
  748
  773
  800
  829
  861
  884
  920
  958
  999
  1,042
  1,088
  1,136
  1,187
  1,241
  1,298
  1,358
  1,422
  1,489
  1,559
  1,633
  1,712
  1,794
  1,880
  1,972
  2,067
Fixed operating expenses, $m
 
  584
  599
  614
  629
  645
  661
  678
  694
  712
  730
  748
  767
  786
  805
  826
  846
  867
  889
  911
  934
  957
  981
  1,006
  1,031
  1,057
  1,083
  1,110
  1,138
  1,166
  1,196
Total operating expenses, $m
  1,196
  1,237
  1,267
  1,299
  1,333
  1,370
  1,409
  1,451
  1,494
  1,541
  1,591
  1,632
  1,687
  1,744
  1,804
  1,868
  1,934
  2,003
  2,076
  2,152
  2,232
  2,315
  2,403
  2,495
  2,590
  2,690
  2,795
  2,904
  3,018
  3,138
  3,263
Operating income, $m
  94
  80
  81
  83
  88
  94
  102
  112
  124
  137
  152
  179
  198
  219
  242
  267
  294
  324
  356
  390
  427
  467
  509
  555
  604
  656
  711
  771
  834
  901
  972
EBITDA, $m
  165
  115
  117
  120
  125
  133
  142
  152
  165
  180
  196
  214
  235
  257
  282
  308
  337
  369
  403
  439
  479
  521
  566
  614
  666
  721
  779
  842
  908
  979
  1,054
Interest expense (income), $m
  18
  17
  18
  18
  19
  20
  21
  22
  23
  25
  26
  28
  29
  31
  33
  35
  37
  39
  41
  44
  46
  49
  52
  55
  58
  62
  65
  69
  73
  77
  82
Earnings before tax, $m
  59
  63
  63
  65
  69
  74
  81
  90
  100
  112
  126
  151
  169
  188
  209
  232
  257
  285
  314
  346
  381
  418
  457
  500
  545
  594
  646
  701
  761
  823
  890
Tax expense, $m
  23
  17
  17
  18
  19
  20
  22
  24
  27
  30
  34
  41
  46
  51
  56
  63
  69
  77
  85
  93
  103
  113
  123
  135
  147
  160
  174
  189
  205
  222
  240
Net income, $m
  25
  46
  46
  47
  50
  54
  59
  65
  73
  82
  92
  111
  123
  137
  153
  169
  188
  208
  229
  253
  278
  305
  334
  365
  398
  434
  472
  512
  555
  601
  650

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  7
  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
  1,037
  1,051
  1,075
  1,103
  1,134
  1,168
  1,206
  1,247
  1,291
  1,339
  1,391
  1,446
  1,504
  1,567
  1,633
  1,704
  1,778
  1,857
  1,941
  2,029
  2,122
  2,221
  2,325
  2,434
  2,549
  2,670
  2,798
  2,933
  3,074
  3,223
  3,380
Adjusted assets (=assets-cash), $m
  1,030
  1,051
  1,075
  1,103
  1,134
  1,168
  1,206
  1,247
  1,291
  1,339
  1,391
  1,446
  1,504
  1,567
  1,633
  1,704
  1,778
  1,857
  1,941
  2,029
  2,122
  2,221
  2,325
  2,434
  2,549
  2,670
  2,798
  2,933
  3,074
  3,223
  3,380
Revenue / Adjusted assets
  1.253
  1.253
  1.253
  1.253
  1.253
  1.253
  1.253
  1.253
  1.253
  1.253
  1.252
  1.252
  1.253
  1.253
  1.253
  1.253
  1.253
  1.253
  1.253
  1.253
  1.253
  1.253
  1.253
  1.253
  1.253
  1.253
  1.253
  1.253
  1.253
  1.253
  1.253
Average production assets, $m
  251
  255
  261
  268
  276
  284
  293
  303
  314
  326
  338
  351
  366
  381
  397
  414
  432
  451
  472
  493
  516
  540
  565
  592
  620
  649
  680
  713
  747
  783
  822
Working capital, $m
  188
  241
  247
  253
  260
  268
  276
  286
  296
  307
  319
  331
  345
  359
  374
  391
  408
  426
  445
  465
  487
  509
  533
  558
  585
  612
  642
  672
  705
  739
  775
Total debt, $m
  424
  433
  450
  470
  492
  517
  544
  573
  605
  639
  676
  716
  758
  802
  850
  900
  954
  1,011
  1,071
  1,134
  1,201
  1,271
  1,346
  1,424
  1,507
  1,594
  1,685
  1,782
  1,883
  1,990
  2,102
Total liabilities, $m
  745
  754
  771
  791
  813
  838
  865
  894
  926
  960
  997
  1,037
  1,079
  1,123
  1,171
  1,221
  1,275
  1,332
  1,392
  1,455
  1,522
  1,592
  1,667
  1,745
  1,828
  1,915
  2,006
  2,103
  2,204
  2,311
  2,423
Total equity, $m
  292
  297
  304
  312
  321
  331
  341
  353
  365
  379
  394
  409
  426
  443
  462
  482
  503
  526
  549
  574
  601
  628
  658
  689
  721
  756
  792
  830
  870
  912
  956
Total liabilities and equity, $m
  1,037
  1,051
  1,075
  1,103
  1,134
  1,169
  1,206
  1,247
  1,291
  1,339
  1,391
  1,446
  1,505
  1,566
  1,633
  1,703
  1,778
  1,858
  1,941
  2,029
  2,123
  2,220
  2,325
  2,434
  2,549
  2,671
  2,798
  2,933
  3,074
  3,223
  3,379
Debt-to-equity ratio
  1.452
  1.450
  1.480
  1.500
  1.530
  1.560
  1.590
  1.620
  1.660
  1.690
  1.720
  1.750
  1.780
  1.810
  1.840
  1.870
  1.900
  1.920
  1.950
  1.970
  2.000
  2.020
  2.050
  2.070
  2.090
  2.110
  2.130
  2.150
  2.160
  2.180
  2.200
Adjusted equity ratio
  0.277
  0.283
  0.283
  0.283
  0.283
  0.283
  0.283
  0.283
  0.283
  0.283
  0.283
  0.283
  0.283
  0.283
  0.283
  0.283
  0.283
  0.283
  0.283
  0.283
  0.283
  0.283
  0.283
  0.283
  0.283
  0.283
  0.283
  0.283
  0.283
  0.283
  0.283

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  25
  46
  46
  47
  50
  54
  59
  65
  73
  82
  92
  111
  123
  137
  153
  169
  188
  208
  229
  253
  278
  305
  334
  365
  398
  434
  472
  512
  555
  601
  650
Depreciation, amort., depletion, $m
  71
  36
  36
  37
  38
  38
  39
  40
  41
  43
  44
  35
  37
  38
  40
  41
  43
  45
  47
  49
  52
  54
  57
  59
  62
  65
  68
  71
  75
  78
  82
Funds from operations, $m
  144
  81
  82
  84
  88
  92
  99
  106
  115
  125
  136
  146
  160
  175
  192
  211
  231
  253
  277
  302
  329
  359
  390
  424
  460
  499
  540
  583
  630
  679
  732
Change in working capital, $m
  9
  5
  6
  6
  7
  8
  9
  9
  10
  11
  12
  13
  13
  14
  15
  16
  17
  18
  19
  20
  21
  23
  24
  25
  26
  28
  29
  31
  32
  34
  36
Cash from operations, $m
  135
  77
  77
  78
  81
  85
  90
  96
  104
  114
  124
  133
  146
  161
  177
  195
  214
  235
  257
  282
  308
  336
  367
  399
  434
  471
  510
  553
  597
  645
  696
Maintenance CAPEX, $m
  0
  -25
  -26
  -26
  -27
  -28
  -28
  -29
  -30
  -31
  -33
  -34
  -35
  -37
  -38
  -40
  -41
  -43
  -45
  -47
  -49
  -52
  -54
  -57
  -59
  -62
  -65
  -68
  -71
  -75
  -78
New CAPEX, $m
  -45
  -5
  -6
  -7
  -8
  -8
  -9
  -10
  -11
  -12
  -12
  -13
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -23
  -24
  -25
  -27
  -28
  -29
  -31
  -33
  -34
  -36
  -38
Cash from investing activities, $m
  -49
  -30
  -32
  -33
  -35
  -36
  -37
  -39
  -41
  -43
  -45
  -47
  -49
  -52
  -54
  -57
  -59
  -62
  -65
  -68
  -72
  -76
  -79
  -84
  -87
  -91
  -96
  -101
  -105
  -111
  -116
Free cash flow, $m
  86
  47
  45
  45
  46
  49
  52
  57
  63
  70
  79
  86
  97
  109
  123
  138
  154
  172
  192
  213
  236
  261
  287
  316
  347
  379
  414
  452
  492
  534
  580
Issuance/(repayment) of debt, $m
  -68
  16
  17
  20
  22
  25
  27
  29
  32
  34
  37
  39
  42
  45
  48
  51
  54
  57
  60
  63
  67
  71
  74
  78
  83
  87
  92
  96
  101
  107
  112
Issuance/(repurchase) of shares, $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
  0
Cash from financing (excl. dividends), $m  
  -67
  16
  17
  20
  22
  25
  27
  29
  32
  34
  37
  39
  42
  45
  48
  51
  54
  57
  60
  63
  67
  71
  74
  78
  83
  87
  92
  96
  101
  107
  112
Total cash flow (excl. dividends), $m
  19
  62
  62
  65
  68
  73
  79
  87
  95
  105
  116
  125
  139
  154
  170
  188
  208
  229
  252
  276
  303
  331
  362
  394
  429
  466
  506
  548
  593
  641
  692
Retained Cash Flow (-), $m
  -23
  -5
  -7
  -8
  -9
  -10
  -11
  -12
  -13
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -24
  -25
  -26
  -28
  -29
  -31
  -33
  -34
  -36
  -38
  -40
  -42
  -44
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
 
  57
  56
  57
  60
  64
  69
  75
  83
  91
  101
  110
  122
  136
  152
  168
  187
  207
  228
  251
  277
  303
  332
  363
  397
  432
  470
  510
  553
  599
  648
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
 
  53
  47
  45
  42
  40
  39
  37
  36
  34
  32
  29
  27
  25
  22
  20
  17
  14
  12
  10
  8
  6
  4
  3
  2
  2
  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. designs, manufactures, and markets thermoplastic corrugated pipes and related water management products for non-residential, residential, agriculture, and infrastructure applications in the United States and internationally. The company provides single, double, and triple wall corrugated polypropylene and polyethylene pipes; and allied products comprising storm retention/detention and septic chambers, polyvinyl chloride drainage structures, fittings, and water quality filters and separators. It also purchases and distributes construction fabrics, as well as other geosynthetic products for soil stabilization, reinforcement, filtration, separation, erosion control, and sub-surface drainage. The company was founded in 1966 and is headquartered in Hilliard, Ohio.

FINANCIAL RATIOS  of  Advanced Drainage Systems (WMS)

Valuation Ratios
P/E Ratio 42.5
Price to Sales 0.8
Price to Book 3.6
Price to Tangible Book
Price to Cash Flow 7.9
Price to Free Cash Flow 11.8
Growth Rates
Sales Growth Rate 9.4%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 40.6%
Cap. Spend. - 3 Yr. Gr. Rate 2.9%
Financial Strength
Quick Ratio 0
Current Ratio 0.1
LT Debt to Equity 126.4%
Total Debt to Equity 145.2%
Interest Coverage 4
Management Effectiveness
Return On Assets 3.5%
Ret/ On Assets - 3 Yr. Avg. 1.1%
Return On Total Capital 3.5%
Ret/ On T. Cap. - 3 Yr. Avg. 1%
Return On Equity 8.9%
Return On Equity - 3 Yr. Avg. 2.4%
Asset Turnover 1.2
Profitability Ratios
Gross Margin 22.1%
Gross Margin - 3 Yr. Avg. 19.2%
EBITDA Margin 11.5%
EBITDA Margin - 3 Yr. Avg. 9.8%
Operating Margin 7.4%
Oper. Margin - 3 Yr. Avg. 5.1%
Pre-Tax Margin 4.6%
Pre-Tax Margin - 3 Yr. Avg. 2.6%
Net Profit Margin 1.9%
Net Profit Margin - 3 Yr. Avg. 0.5%
Effective Tax Rate 39%
Eff/ Tax Rate - 3 Yr. Avg. 74.5%
Payout Ratio 64%

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 $1291 million for the last fiscal year's total revenue generated by Advanced Drainage Systems. The default revenue input number comes from 2016 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 49.6%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $570 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 4.1% 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 19.4%.

Life of production assets of 10 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 18.3%. 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 - $292 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 53.54 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 $1.0 billion.

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COMPANY NEWS

▶ 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]
Stock chart of WMS 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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