Is the price of advanced drainage systems reasonable following continued growth and increasing U.S. infrastructure investment?

• Wondering if Advanced Drainage Systems might be undervalued or living up to its price? You are not alone, as many investors are considering whether there is room to move down or whether now is the time to reconsider.
• Shares are up 7.1% in the past week, are up 34.3% year-to-date, and have returned an impressive 119.1% over the past five years. These moves reflect changing market optimism and long-term potential.
• Recent headlines have highlighted the company's continued expansion into sustainable water management as well as growing infrastructure investments in the US. These developments have both increased confidence in Advanced Drainage Systems and sparked a new wave of interest in its stock.
• Despite the increasing interest, the company's score stands at 0 out of 6, suggesting that the company is not currently undervalued according to our valuation checks. However, as you will see, evaluation is not always that simple. Next, we'll break down the traditional approaches and provide a smarter way to look at value at the end of this article.

Advanced Drainage Systems only scores 0/6 on our evaluation tests. See what other warning signs we found in the full review breakdown.

Approach 1: Advanced Drainage Systems Discounted Cash Flow (DCF) analysis

A discounted cash flow (DCF) model estimates a company's current value by projecting its future cash flows and then discounting them to their current value. This approach provides an estimate of what investors could reasonably pay for the company now, given its future earnings power.

For Advanced Drainage Systems, the most recently reported free cash flow is $536 million. Cash flow is forecast to remain strong over the next decade, with analysts providing annual estimates for the first five years and subsequent years extrapolated by Simply Wall St. Free cash flow is expected to be $517.2 million by 2027 and $581.7 million by 2035.

The DCF model calculates an intrinsic value of $108.76 per share. A comparison to the current market price shows an implied discount of -41.1%, meaning the stock is trading well above its forecast fair value. Using this approach, Advanced Drainage Systems shares appear significantly overvalued at today's prices.

Result: OVERRATED

Our discounted cash flow (DCF) analysis suggests that Advanced Drainage Systems may be overvalued by 41.1%. Discover 928 undervalued stocks or create your own screener to find better opportunities.

For more information on how we determine this fair value for Advanced Drainage Systems, please see the Valuation section of our Company Report.

Approach 2: Price-performance ratio of Advanced Drainage Systems

For profitable companies, the price-to-earnings ratio (P/E) is a widely used metric for assessing valuation because it directly relates a company's current price to its earning power. This makes the P/E ratio particularly suitable for assessing established companies such as Advanced Drainage Systems that continually generate profits.

The interpretation of what constitutes a “fair” PE ratio depends on factors such as expected growth rates and risk. In general, companies that have higher earnings growth or lower perceived risks can justify a premium or higher P/E multiple compared to slower-growing or riskier companies in the same sector.

Looking at the numbers, Advanced Drainage Systems trades at a P/E ratio of 26x, which is well above the construction industry average of 19x and the industry average of 18x. On the face of it, this suggests that the stock is valued at a premium compared to both its direct peers and the broader sector.

However, Simply Wall St introduces the “Fair Ratio”, which reflects a more nuanced P/E ratio based on the company's own growth prospects, profitability, risk profile, market capitalization and industry context. Unlike simple peer or industry comparisons, the Fair Ratio represents a tailored benchmark that answers whether a premium or discount is actually warranted for that specific company.

In this case, Advanced Drainage Systems' fair ratio is 26x, which is almost exactly the current PE multiple. This orientation indicates that the market is valuing the company appropriately given its prospects, financial strength and risks.

Result: APPROXIMATELY CORRECT

P/E ratios tell the story, but what if the real opportunity lies elsewhere? Discover 1,440 companies where insiders are betting on explosive growth.

Improve your decision making: Choose your narrative on Advanced Drainage Systems

We already mentioned that there is an even better way to understand the rating. That's why we introduce you to Narratives. Narratives are a simple but powerful tool that helps you articulate a clear story behind the numbers: they reflect your own view of a company's future, e.g. B. its fair value, projected sales, profits and profit margins based on your interpretation of its prospects and risks. By linking a company's story to a financial forecast and then to a fair value, Narratives allows investors to go beyond static numbers and make dynamic, belief-based decisions.

Available on the Simply Wall St community site, Narratives makes investing easy and collaborative. Millions are already using them. They are automatically updated when new news or earnings are published, so you can see at a glance whether your story is still in line with the latest facts and whether the current price offers opportunities. For example, some Advanced Drainage Systems investors might build a bullish view by forecasting margin expansion and a fair value of $172, while more cautious competitors see risks in cyclical demand and set their fair value closer to $130. Narratives give you the opportunity to choose the story (and value) that fits your belief and to act decisively when price and thesis diverge.

Do you think there is more to the story of Advanced Drainage Systems? Visit our community to see what others are saying!

This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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