Core & Main (CNM)

Water and fire protection solutions company Core & Main (NYSE:CNM) announced better-than-expected revenue in Q4 CY2024, with sales up 17.9% year on year to $1.70 billion. On the other hand, the company’s full-year revenue guidance of $7.7 billion at the midpoint came in 1% below analysts’ estimates. Its GAAP profit of $0.33 per share was 12.2% below analysts’ consensus estimates.

Company Overview

Formerly a division of industrial distributor HD Supply, Core & Main (NYSE:CNM) is a provider of water, wastewater, and fire protection products and services.

Focusing on narrow product categories that can lead to economies of scale, infrastructure distributors sell essential goods that often enjoy more predictable revenue streams. For example, the ongoing inspection, maintenance, and replacement of pipes and water pumps are critical to a functioning society, rendering them non-discretionary. Lately, innovation to address trends like water conservation has driven incremental sales. But like the broader industrials sector, infrastructure distributors are also at the whim of economic cycles as external factors like interest rates can greatly impact commercial and residential construction projects that drive demand for infrastructure products.

Competitors in the water and fire protection industry include Ferguson (NYSE:FERG), Mueller Water Products (NYSE:MWA), and Essential Utilities (NYSE:WTRG).

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Luckily, Core & Main’s sales grew at an incredible 17% compounded annual growth rate over the last five years. Its growth surpassed the average industrials company and shows its offerings resonate with customers, a great starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Core & Main’s recent performance shows its demand has slowed significantly as its annualized revenue growth of 5.8% over the last two years was well below its five-year trend.

This quarter, Core & Main reported year-on-year revenue growth of 17.9%, and its $1.70 billion of revenue exceeded Wall Street’s estimates by 1.7%.

Looking ahead, sell-side analysts expect revenue to grow 4.5% over the next 12 months, similar to its two-year rate. This projection is underwhelming and implies its products and services will see some demand headwinds. At least the company is tracking well in other measures of financial health.

Core & Main has bad unit economics for an industrials company, giving it less room to reinvest and develop new offerings. As you can see below, it averaged a 26.3% gross margin over the last five years. That means Core & Main paid its suppliers a lot of money ($73.67 for every $100 in revenue) to run its business.

Core & Main produced a 26.6% gross profit margin in Q4, in line with the same quarter last year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Core & Main has done a decent job managing its cost base over the last five years. The company has produced an average operating margin of 9.6%, higher than the broader industrials sector.

Analyzing the trend in its profitability, Core & Main’s operating margin rose by 4.7 percentage points over the last five years, as its sales growth gave it operating leverage.

This quarter, Core & Main generated an operating profit margin of 7.3%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Core & Main’s EPS grew at an astounding 65.7% compounded annual growth rate over the last five years, higher than its 17% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into Core & Main’s earnings to better understand the drivers of its performance. As we mentioned earlier, Core & Main’s operating margin was flat this quarter but expanded by 4.7 percentage points over the last five years. On top of that, its share count shrank by 3.2%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Core & Main, its two-year annual EPS growth of 17.4% was lower than its five-year trend. We still think its growth was good and hope it can accelerate in the future.

In Q4, Core & Main reported EPS at $0.33, up from $0.29 in the same quarter last year. Despite growing year on year, this print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects Core & Main’s full-year EPS of $2.05 to grow 24.6%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Core & Main has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 7.6% over the last five years, slightly better than the broader industrials sector.

Taking a step back, we can see that Core & Main’s margin expanded by 2.3 percentage points during that time. This is encouraging because it gives the company more optionality.

Core & Main’s free cash flow clocked in at $224 million in Q4, equivalent to a 13.2% margin. The company’s cash profitability regressed as it was 13.9 percentage points lower than in the same quarter last year, but it’s still above its five-year average. We wouldn’t read too much into this quarter’s decline because investment needs can be seasonal, causing short-term swings. Long-term trends carry greater meaning.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Core & Main’s five-year average ROIC was 16.5%, beating other industrials companies by a wide margin. This illustrates its management team’s ability to invest in attractive growth opportunities and produce tangible results for shareholders.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Uneventfully, Core & Main’s ROIC has stayed the same over the last few years. Rising returns would be ideal, but this is still a noteworthy feat since they're already high.

Core & Main reported $8 million of cash and $2.51 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $930 million of EBITDA over the last 12 months, we view Core & Main’s 2.7× net-debt-to-EBITDA ratio as safe. We also see its $70 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Core & Main blew past analysts’ EBITDA expectations this quarter. We were also happy its revenue outperformed Wall Street’s estimates. On the other hand, its EPS missed significantly and its full-year EBITDA guidance fell slightly short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock traded down 3.9% to $47.69 immediately after reporting.

Updated: May 22, 2025 at 10:58 PM EDT

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

In our opinion, Core & Main is a solid company. To kick things off, its revenue growth was exceptional over the last five years. And while its flat organic revenue disappointed, its expanding operating margin shows the business has become more efficient. On top of that, its market-beating ROIC suggests it has been a well-managed company historically.

Core & Main’s P/E ratio based on the next 12 months is 21.9x. When scanning the industrials space, Core & Main trades at a fair valuation. For those confident in the business and its management team, this is a good time to invest.

Wall Street analysts have a consensus one-year price target of $59.99 on the company (compared to the current share price of $53.23), implying they see 12.7% upside in buying Core & Main in the short term.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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