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About Core & Main

In developing a sort of framework leading into the 2024 United States Presidential Election, I had my suspicions that former President Trump was going to be the victor, and the main reason wasn’t rooted in personal beliefs, but primarily in the betting markets and also through market indicators.

For instance, I was intently watching the U.S. dollar and the Mexican peso weeks and days coming into election night, and the gradual weakening of the peso and the strengthening of the USD told me that the market was pricing in a Trump victory.

While, at the time, this wasn’t a certainty, it was what both the data and my gut were telling me and suffice it to say that it helps when investors, big and small, vote with their invested capital and throw some forward-looking, predictive signals my way. In determining this as being the case, I started hashing out some of the logical plays to make if I felt full conviction that President Trump was going to be elected for his second term (which I evidently did), which steered me towards considering his previous talking points and initiatives back in 2016, and the first two that came to mind were infrastructure and deregulation.

Make no mistake about it, upon doing some research into the infrastructure category, attempting to devise some plays leading into a Trump victory (prior to the market pricing it in after the fact), St. Louis, Missouri-based Core & Main appeared on my radar, which is quite sensible being that this is a leading distributor of pipes, valves, and fitting (PVF) products across a few primary categories, including water and wastewater products, storm drainage mechanisms, and fire protection products.

The duality of Core & Main.

At any rate, these specific products include castings (i.e., the metal, copper-colored plates that separate your foot from stepping into a water drain, you know them when you see them), clamps and couplings, pumps, meters, fittings, fire hydrants, among other products that somehow or another utilize or interact with valves, pipes, and fittings. Whether you realize it or not, these are essential products and these serve essential roles in our everyday lives yet we hardly ever know it, nor care.

Nevertheless, 67% of the company’s total sales comes from selling PVF products, the rest generally falling into the category of storm drainage products and services (more on that later).

The thesis here is that in President Trump’s final term, he will focus on (among other things, of course) modernizing and upgrading critical infrastructure within the United States, and he and his administration will more than likely support major distributors such as Core & Main through partnerships and longer-term contracts. Another element of the thesis which is quite important relates to more macro matters (i.e., aspects including fed funds rate, mortgage rates, inflation, GDP, etc..), and where not only this company stands at the moment, but more importantly, where it will more than likely be positioned in the next 18-24 months.

Objectively, I still hold the opinion (but simultaneously remain open-minded, always) that the Fed will have to pivot from its current slow and steady interest rate cut policy and raise rates in order to combat the sticky inflation (confirmed by the November 13, 2024 report detailing that the annual inflation rate increased from 2.4% (September 2024) to 2.6%). Clearly, this isn’t exactly the best news for an industrial supplier such as this one, however, the bigger story here, besides the infrastructure-focus President Trump’s second term will involve, is trade policies, particularly those involving imposing tariffs on Chinese imports. While we could take for days regarding the broader macroeconomic implications at play and also dish over personal perspectives on the matter, objectivity and logic must reign supreme when it comes to investing.

Subsequently, if costs on imported materials rise as a direct result of tariffs, this will likely spur demand and growth in domestic, American production and sourcing. Therefore, larger domestic suppliers such as Core & Main stand to gain against foreign competitors, bestowing upon this company a distinct competitive advantage, and rendering it a defined catalyst that will help sufficiently defend itself from and perhaps even outpace inflationary pressures, especially given the mission critical nature of the products it supplies.

Now that we’ve established the playing field as it relates to Core & Main and my personal thesis, let’s take it a step further and dive into the company’s financials with the aim of finding out just how financially capable this firm is as we look onto 2025 and beyond.

CNM’s stock financials

Core & Main is a $9.47 billion company (according to its market capitalization) with a stock price of $48.50, a price-to-earnings (P/E) ratio of 23.26, all while not currently paying out a consistent annual dividend, and I don’t feel as though I have a whole lot to complain about quite yet. I definitely wasn’t coming into this stock analysis article thinking to myself “oh boy, this company really ought to have an annual dividend or else that’s the first and last straw,” nor was I terribly concerned with where its present P/E ratio stood given my aforementioned catalysts and underlying thesis, with the fact that the market hardly cares about respecting the standard, fair value P/E benchmark of 20 and keeping a stock price unwaveringly tethered to said benchmark.

Still, I find it to be an ultra-supplemental plus (that’s my really polite way of saying inconsequential) that the company’s current price-to-earnings ratio isn’t trading all that high in the sky.

In gleaning more about this company, its executives are stewarding just north of $5 billion in total assets and $3.6 billion in terms of total liabilities, initially displaying a fine balance sheet (not awful, not exceedingly great), with its cumulative assets outweighing its aggregate liabilities by a decent margin (particularly when considering the line of business it’s in), and in assuming a more short-term vantage point, Core & Main appears to be fine in terms of its total current assets and liabilities, total current assets weighing in at $1.7 billion and current liabilities in at $774 million, and even if this company has to tack on some more debt driven by commodity cost fluctuations, orders, growth, or for any other legitimate reasons, this is a highly free cash flow generative enterprise. That is to say that Core & Main is able to convert just about 73% of its earnings before interest and taxes (EBIT) into free cash flow, telling me that this firm has a currently refined capability to pay down its debts.

The services segment of its business also lends some cushion, as it’s a means of diversifying its revenue streams (while also maintaining focus) and it also pads the company during times of economic slowdown, as these types of services tend to be less susceptible to economic fluctuations, offering more stability.

Onto the company’s income statement, Core & Main’s revenues (specifically referencing since 2020) have been rising each and every year during this period, basing out at $3.3 billion in 2020 and topping out at its latest reported figure of $6.7 billion (reported January 28th, 2024), more notably jumping from $3.6 billion in 2021 to just above $5 billion in 2022, the main (and Core) catalysts being the price hikes it implemented, driven by persistent inflationary pressures, but the company also inked eight strategic acquisitions in fiscal year 2021, inherently adding handsomely to its revenues.

These acquisitions really weren’t anything fancy (and for this company, that is exactly how it should be), but a series of reasonable and practical buyouts, as each acquired company was basically a smaller supplier in the waterworks distribution sector. The main positive here, however, is that it was able to maintain pricing power well when inflation was biting, but this still makes a good deal of sense given that a significant portion of the company’s revenues are derived from municipal government agencies, acting as a sort of third-rail, as opposed to selling to more inflation-sensitive individuals or businesses.

On the vein of the company’s cash flow statement, Core & Main’s total cash from operations have shown some serious recent growth, rising from $401 million in 2023 to its most recently reported figure of just over $1 billion (again, early 2024), mostly fueled by higher net income, which was fueled by higher demand (translating into higher revenues) for infrastructure products, specifically in the waterworks sector, plus, adding some smaller, efficient companies to the portfolio hardly hurt. I also looked deeper into some of the company’s books and it also became much more operationally efficient during this era, bearing fruit through the pursuit of initiatives such as better inventory management along with cost control measures, enabling leadership to tend to expenses more prudently.

And this is hardly even the best part.

The best part is that in 2022, Core & Main’s total cash from operations stood at -$31 million (due to poor inventory management/build-up and increased accounts receivable, here meaning that the company made a lot of sales through offering customers store credit, meaning cash had not yet been collected from its customers, adding to the cash flow strain), prompting leadership to refine inventory management practices and collect cash more efficiently from customers.

I find it highly encouraging that they found themselves in a cash flow hole and took hardly any time to put the shovel down.

CNM’s stock fundamentals

Lastly, the company’s net profit margin (as displayed on Charles Schwab’s platform) is 6.61%, and on a comparable basis, it’s in good company, with, for instance, some of its more direct and threatening competitors consisting of Watsco (NYSE: WSO) and Ferguson (NYSE: FERG), each respectively boasting net profit margins of 8.28% and 5.85%. In zooming out and looking forward, there are a handful of tangible reasons leading me to believe that Core & Main will beef up its net profit margin throughout the next few years given reasons I’ve previously stated, including more contracts, better inventory management, among other things.

Should you buy CNM stock?

The financial underpinnings of this distributor are as solid as the products it sells.

Its balance sheet is just fine, its revenues are stable-to-growing, its cash flows improvement has been serious and it has been growing its cash from operations at a tremendous rate in most recent years, and its net profit margin is in good form.

Being that the entire genesis of me looking into this company was President Trump’s incoming second term in Office, I view these solid financial bases as being more the cherry on top than anything. Namely, make no mistake about it, the basis for the play here is increased infrastructure spend, but I also enjoy the fact that the company has clear pricing power in order to protect itself in the event that rates and/or inflation rise in the coming months and years, not to mention the inherent domestic production focus that President Trump has historically favored, all culminating into higher demand for this company and the products and services it supplies.

All things considered, I think a “buy” rating is in order.

DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.

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