Water management company Advanced Drainage Systems (NYSE: WMS) reported Q3 CY2025 results exceeding the market’s revenue expectations, with sales up 8.7% year on year to $850.4 million. The company expects the full year’s revenue to be around $2.95 billion, close to analysts’ estimates. Its non-GAAP profit of $1.97 per share was 19.8% above analysts’ consensus estimates.

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Scott Barbour, President and Chief Executive Officer of ADS commented, "We delivered strong results in the second quarter, a testament to the key sales strategies we have executed to drive growth in core markets. Revenue from both Infiltrator and Allied products increased double digits compared to the prior year. This growth, in conjunction with favorable price/cost, end market and product mix resulted in a highly-resilient Adjusted EBITDA margin of 33.8%."

Company Overview

Originally started as a farm water drainage company, Advanced Drainage Systems (NYSE: WMS) provides clean water management solutions to communities across America.

Revenue Growth

A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Thankfully, Advanced Drainage’s 10.4% annualized revenue growth over the last five years was solid. Its growth beat the average industrials company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Advanced Drainage’s recent performance shows its demand has slowed as its annualized revenue growth of 2.7% over the last two years was below its five-year trend.

We can dig further into the company’s revenue dynamics by analyzing its most important segments, Pipe and Infiltrators, which are 48.6% and 21.1% of revenue. Over the last two years, Advanced Drainage’s Pipe revenue (thermoplastic corrugated pipes) averaged 3.6% year-on-year declines. On the other hand, its Infiltrators revenue (wastewater treatment systems) averaged 21.8% growth.

This quarter, Advanced Drainage reported year-on-year revenue growth of 8.7%, and its $850.4 million of revenue exceeded Wall Street’s estimates by 6.6%.

Looking ahead, sell-side analysts expect revenue to grow 1.1% over the next 12 months, a slight deceleration versus the last two years. This projection is underwhelming and implies its products and services will face some demand challenges.

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Operating Margin

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Advanced Drainage has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 21.5%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Advanced Drainage’s operating margin rose by 7.9 percentage points over the last five years, as its sales growth gave it immense operating leverage.

This quarter, Advanced Drainage generated an operating margin profit margin of 26.3%, up 2.3 percentage points year on year. Since its gross margin expanded more than its operating margin, we can infer that leverage on its cost of sales was the primary driver behind the recently higher efficiency.

Earnings Per Share

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Advanced Drainage’s EPS grew at a spectacular 17.1% compounded annual growth rate over the last five years, higher than its 10.4% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into the nuances of Advanced Drainage’s earnings can give us a better understanding of its performance. As we mentioned earlier, Advanced Drainage’s operating margin expanded by 7.9 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; interest expenses and taxes can also affect EPS but don’t tell us as much about a company’s fundamentals.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For Advanced Drainage, its two-year annual EPS growth of 1.1% was lower than its five-year trend. We hope its growth can accelerate in the future.

In Q3, Advanced Drainage reported adjusted EPS of $1.97, up from $1.70 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Advanced Drainage’s full-year EPS of $6.04 to stay about the same.

Key Takeaways from Advanced Drainage’s Q3 Results

We were impressed by how significantly Advanced Drainage blew past analysts’ EBITDA expectations this quarter. We were also excited its revenue outperformed Wall Street’s estimates by a wide margin. On the other hand, its Pipe revenue missed. Zooming out, we think this quarter featured some important positives. The stock traded up 4.9% to $141.26 immediately following the results.

Advanced Drainage may have had a good quarter, but does that mean you should invest right now? We think that the latest quarter is only one piece of the longer-term business quality puzzle. Quality, when combined with valuation, can help determine if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free for active Edge members.