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Advanced Drainage shares rise after solid earnings, Baird upgrade

Construction workers use a concrete bucket to spread gravel in a retention field drainage system.
The Hattiesburg American | George Clark | AP
Construction workers use a concrete bucket to spread gravel in a retention field drainage system.

Shares of Advanced Drainage Systems spiked Friday after Baird Equity Research upgraded the stock to "outperform" from "neutral," citing solid fundamentals and removal of several overhangs.

Baird analyst Michael Halloran said in a research note that there is potential for the drainage equipment company to take advantage of President-elect Donald Trump's promises for infrastructure spending. The company does the vast majority of its business in the U.S. and is poised to benefit from Trump's push towards domestic manufacturing, Halloran said.

The upgrade came on the back of an earnings report for the second fiscal quarter of 2017, a period that Baird called difficult due to decreased domestic construction.

During the quarter, ADS saw adjusted earnings of 35 cents a share on $361 million in sales. Analysts had expected the company to report earnings of 28 cents a share on $359.7 million in revenue, according to Thomson Reuters consensus estimates.

The ability of the company to produce solid earnings in the face of strong "headwinds" makes Baird confident that the stock will perform well in 2017.

"Importantly, we believe these headwinds are largely behind the company, and, in our view, [Advanced Drainage Systems] now represents a compelling value idea with attractive free cash flow characteristics and outsized exposure to U.S.-based cyclical construction markets that is at an attractive discount to its peer group and our coverage list," Halloran said.

Five-day performance of Advanced Drainage Systems

The stock gained as much as 12 percent. It later pared those gains, but still ended the day about 2 percent higher. With Friday's gains, the stock has surged 12 percent in the past month.

Disclosures: Robert W. Baird makes a market in the securities of Advanced Drainage Systems. The firm and/or its affiliates expect to receive or intend to seek investment-banking related compensation from the company within the next three months.