Core & Main, Inc

Moat: 3/5

Understandability: 1/5

Balance Sheet Health: 4/5

Core & Main, Inc. is a leading specialized distributor of water, wastewater, storm drainage, and fire protection products and related services in the U.S. providing solutions to municipalities, private water companies, and professional contractors nationwide.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Core & Main operates a vast distribution network across the United States, focusing primarily on the maintenance, repair, and replacement (“MRO”) of water and wastewater infrastructure, along with providing fire protection products and related services. They boast nearly 300 locations across the U.S. and emphasize a customer-centric approach, providing product expertise, project support, and delivery capabilities. They operate in three primary construction sectors: municipal, non-residential, and residential.
While the company’s structure has been consolidated, they are focused on growth through a mix of organic growth initiatives as well as strategic acquisitions. This strategy has yielded strong returns and cash generation. They also focus on new product technology and innovative solutions to promote water conservation and improve system efficiency.

Revenue Distribution

Core & Main’s revenue is derived from a variety of sources across diverse customer segments. Here’s a breakdown:

  • Municipal Waterworks: Serving public municipalities for drinking water and wastewater systems with pipes, valves, and related materials, representing approximately 40-50% of total sales.
  • Non-Residential: Servicing commercial and industrial customers for water, storm, drainage, and fire protection solutions making up around 35-45% of total sales.
  • Residential (Single-Family): Supplying materials for residential construction projects with storm drainage, fire protection, and water distribution systems, usually comprising less than 15% of total sales. Their customer base is diverse, with no one customer accounting for more than approximately 5% of total sales. The company’s broad product offerings include pipes, fittings, valves, hydrants, fire protection supplies, storm drainage systems, and specialized services.

Industry Trends & Competitive Landscape

The water infrastructure industry is characterized by significant long-term trends that should provide consistent growth to its market. Key factors include:

  • Aging infrastructure across the U.S. driving demand for maintenance, repair, and replacement of existing systems.
  • Increasing regulations for water safety and conservation.
  • Investment in water infrastructure are set to increase due to climate change, water scarcity, and general infrastructure spending.
  • Demand is driven by population growth and urbanization, particularly in sunbelt and metropolitan areas, which leads to a greater need for efficient water management systems.
  • A highly fragmented market with regional, smaller players.
  • Increasing awareness of ESG (environmental, social, and governance) factors. The overall market is highly competitive with local, regional, and national distributors competing on price, service, and technical expertise. However, companies with extensive distribution networks, strong supplier relationships, and deep product knowledge have a competitive advantage in winning customers.

What Makes Core & Main Different?

  • Scale and Geographic Reach: They operate one of the largest distribution networks across the U.S., providing a wide footprint and access to a large customer base.
  • Product Breadth: They offer a broad array of products and services tailored to customer needs.
  • Strong Customer Relationships: They have a long-term relationship with municipalities, contractors, and private water companies, creating consistent and predictable demand.
  • Supply Chain Capabilities: They work with various suppliers which provides access to a diverse product base, and also the ability to respond quickly to supply disruptions.
  • Growing Through Acquisitions: Their acquisition strategy to create more value and grow their geographic reach.

Financials in Depth

Core & Main’s financials reveal a company with strong growth and profitability trends. Here are the key takeaways:

  • Revenue Growth: In their latest quarter, sales reached $1.63 billion, compared to $1.33 billion in the prior-year period, indicating strong sales growth across all their segments. Gross profit increased to $494 million, a 20.1% increase over the previous period.
  • Gross Profit Margins: They have had strong gross profit margins, with management noting the improvement can be attributed to higher sales volume, and supply chain efficiency. Gross profit for the quarter was up by 20.1% compared to last year.
  • Operating Expenses: They have focused on streamlining their business operations and reducing operating costs, and they had a lower operating expense as a percentage of their revenue compared to last year.
  • Net Income: Net income attributable to Core & Main, Inc. totaled $119 million which is a notable increase.
  • Adjusted EBITDA: They had an adjusted EBITDA of $218.8 million compared to $145.6 million in the prior-year quarter, illustrating their ability to improve overall efficiency.
  • Leverage: Their Debt-to-EBITDA leverage ratio is under their targeted range, meaning their financial health is good.
  • Net debt: They reduced their net debt by $112 million to $2.325 billion during the quarter, as their cash flow generation was strong.
  • Inventory: The value of inventory has increased to $2.305 billion, this is caused by a combination of new products and higher market prices, while inventory days remained unchanged at 105 days.
  • CapEx: Capital expenditures also increased to $173 million, as investments in new branches and supply chain were made.
  • Liquidity: They have an impressive liquidity position, with 1.3 billion in available borrowing under their Senior ABL Credit Facility.

Detailed Takeaways:

  • The company has had strong momentum in their growth strategies, with increased sales and profits.
  • The company is executing a good growth strategy combining organic growth and strategic acquisitions.
  • The ability to deliver positive cash flows and improve their margins indicates strong financial performance.

Moat Analysis

Core & Main possesses a moderate economic moat. Here’s why:

  • Scale and Distribution Network: They have a nationwide scale and are well established. Their distribution network is hard to replicate, providing them a competitive advantage, as they can deliver products to a large number of customers on-time and at low cost. However, some regions may lack this and will need to rely on local competition.
  • Customer Relationships: They have long-term relationships with customers and operate within fragmented markets, creating sticky clients. This is supported by their high rates of repeat customers. They may be less differentiated in that the customer ultimately wants a reliable and good priced product.
  • Supplier Relationships: They have strong supplier relationships, and they also have private-label products that improve their margin profile. The competitive landscape means the moat isn’t as strong as other companies but it does seem to exist.

Moat Rating: A 3 out of 5

  • Justification: They have significant advantages in scale, distribution, and customer relationships, which allows them to outcompete smaller competitors. Although they are well-positioned, their dependence on commodity sales limits pricing power and it would be difficult to achieve wide-moat-level protection. Furthermore, they don’t have the unique technology that some software and tech companies possess.

{: .important} Legitimate Risks To Moat & Business

  • Economic Cyclicality: The company is dependent on construction activity, which is inherently cyclical. A slowdown in construction, particularly municipal projects, can reduce their revenue. The company has shown ability to be able to manage these issues during downturns.
  • Integration Risks: Acquisitions, while crucial to growth, may pose challenges with integration and value capture. The more they acquire, the more risk involved.
  • Supply Chain Disruptions: The company is vulnerable to supply chain disruptions due to global conditions or supplier issues, which can increase costs and reduce availability of products. The war in Ukraine has disrupted global trade flows.
  • Competition: Their competitors are always trying to underprice them in the commodity space, although most are smaller, there’s always a chance for new innovative competition that could cause a disruption to their market.
  • Pricing Pressure The company sells a variety of commodity-like products, in most cases they will not have pricing power.

Business Resilience

  • Core & Main’s diverse customer base and their emphasis on MRO (Maintenance, Repair, and Overhaul) activities provide some resilience to their business due to consistent demand from these sources.
  • The nature of the products they provide are necessary for maintaining essential water and wastewater infrastructure, which means demand will be there in good and bad times.
  • They have shown their ability to quickly respond to supply chain disruptions, which should mean that they can navigate such disruptions well in the future.
  • Their consistent profitability and focus on value creation indicates the company has good management that puts long-term value creation over short-term metrics.
  • Their balance sheet does allow them some room to maneuver during bad times.

Understandability: 1 / 5 Core & Main’s business is a simple concept but very complex in terms of specifics, including industry specific terms, different business lines that are intertwined, various products and services sold. Understanding which parts of the business create the most value is a complicated process, since there are so many parts. Rating: 1 out of 5

Balance Sheet Health: 4 / 5

  • Liquidity: They have a significant amount of liquidity, and easily have a good source of funds to draw on if they are to need it.
  • Capital Structure: While their current Debt-to-EBITDA has fluctuated, it is still below their target. The company is focused on bringing this down. Their long-term debt is easily manageable.
  • Risk of Bankruptcy: The probability of the company going bankrupt is very low and it is unlikely they will face such issues due to their solid financial standing.

Rating: 4 out of 5

Additional Notes:

  • Concerns About Valuation: In Q1 2024’s conference call, analysts questioned whether the current trading multiple would be sustainable.
  • Management Commentary on Valuation: Management believes their multiples are reasonable and in-line with peers, due to the companies strong margins, financial standing, and growth.
  • Share Repurchases: They have a share buyback program, and the goal is to use excess cash to acquire more shares and bring down debt.
  • Future Focus: The company remains focused on organic growth, integrating new acquisitions, and investing in their supply chain.